رقابت بازار محصولات و مدیریت سود: یک تجزیه و تحلیل سطح شرکتی Product Market Competition and Earnings Management: A Firm-Level Analysis

1. Introduction In economic literature, intense competition can discipline managers to enhance firm value and improve social efficiency. 1 Nevertheless, several recent studies find that competition can also induce managers to take excessive risks and engage in unethical behavior. In this paper, we employ a firm-level competition measure to examine how managers’ perceived competition pressure affects their incentives to manage earnings. Competition may have two opposing effects on managerial behavior. On the one hand, it can exert disciplinary influences over managers and motivate them to make efforts by providing information on their peers’ performance and/or through increasing the pressure from dismissal, firm liquidation, and takeovers (see Fama. 1980; Holmstrom, 1999; Grullon and Michaely, 2007; Tang, 2012; Giroud and Mueller, 2011). On the other hand, competition pressure can induce managers to manipulate financial results in order to mitigate the threats of dismissal, firm liquidation, and takeovers, or to improve their opportunities and conditions for financing (e.g. Bergstresser, and Philippon, 2006; Teoh, Welch, and Wong, 1998a and 1998b; Dechow, Sloan, and Sweeney, 1996; Morellec, Nikonov, and Zucchi, 2013; Markarian and Santalo, 2014). 2 As investors value firms based on their ability to generate profits, managers can exert influences over market valuation by managing earnings. Such behavior makes reported profits falsely reflect the firm’s productivity and can even damage the firm’s long-term value. Thus, earnings management can lead to distorted investment decisions and inefficient resource allocation in an economy. In this paper, we employ a firm-level competition measure introduced in Li, Lundholm, and Minnis (2013), to examine the relationship between firm competition pressure and earnings management. Existing studies generally use competition measures that reflect an industry’s overall situation and ignore variations within the industry (e.g. Karuna, Subramanyam, and Tian, 2012; Balakrishnan and Cohen, 2013; Cheng, Man, and Yi, 2013; Ali, Klasa, and Yeung, 2012; Markarian and Santalo, 2014). Li, Lundholm, and Minnis (2013) construct a firm-level competition measure from the textual analysis of firms’ 10-K disclosures. This measure can capture managers’ perceived competition pressure, thus allowing variations across firms within each industry. It does not require an assumption on the classification of industries, and it incorporates competition information from various dimensions and sources including foreign firms, private firms, and potential entrants. This measure has several advantages over the industry-level measures in the analysis of the effects that competition has on firms’ earnings management. For example, the competition measure reflects managers’ perception, which can be especially useful for the examination of the managers’ decisions on financial reporting and operations. More importantly, the employment of a firm-specific measure allows the examination of the relation between competition and earnings management among comparable firms.