The impact of product market competition on earnings quality

The objective of this paper is to examine the impact of product market competition on earnings quality. Based on a sample from the US manufacturing sector for the period 1996–2005, we find consistent evidence showing a positive relation between product market competition and earnings quality. Additi...

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Bibliographic Details
Published in:Accounting and finance (Parkville) 2013-03, Vol.53 (1), p.137-162
Main Authors: Cheng, Peter, Man, Paul, Yi, Cheong H.
Format: Article
Language:English
Subjects:
Competition
Competitive advantage
D80
Earnings management
Earnings quality
Industry concentration
Information management
L10
M40
M41
Monopolistic competition
Product market competition
Studies
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Summary:The objective of this paper is to examine the impact of product market competition on earnings quality. Based on a sample from the US manufacturing sector for the period 1996–2005, we find consistent evidence showing a positive relation between product market competition and earnings quality. Additional tests also confirm a positive relation between product market competition and the precision of public and private information held by investors and analysts. We also provide evidence that firms competing in concentrated and heterogeneous industries are associated with a number of earnings attributes and information quality not shared by those competing in concentrated but homogeneous industries. These findings are consistent with the intuition that firms enjoying a monopolistic advantage tend to avoid the attention of their competitors and politicians by creating a more opaque information environment.
ISSN:0810-5391
1467-629X
DOI:10.1111/j.1467-629X.2011.00457.x