Product Market Competition and Earnings Management: A Firm-Level Analysis

Abstract

In this paper, we employ a firm-level measure of product market competition constructed from the textual analysis of firms’ 10-K filings and examine the relationship between managerial perceived competition pressure and firms’ earnings management. We find that misstatement is positively related to product market competition, which is consistent with the notion that competition pressure increases managerial incentives to manage earnings. We also find that real earnings management is negatively related to product market competition. This suggests that real earnings management involves actions that decrease firms’ competitiveness and is costly for firms under high competition pressure.

Keywords: competition, earnings management

JEL Classification: M41