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Product market competition and real activities manipulation: Theory and implications

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  • Lee, Cheng-Few
  • Sung, Hao-Chang

Abstract

We investigate how a firm manipulates its real activities in production to meet the earnings target in product market competition against its product-market rivals. We show that the equilibratory way to reach the earnings target is to set a higher first-period output level, reaching a higher short-term profit level. However, once the expected level of demand uncertainty is high, a firm will exploit this effect on its output choice by taking a mixed strategy and raising its short-term output level. This result suggests that one should consider longer-horizon paths of variables to detect opportunistic real activities manipulation.

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  • Lee, Cheng-Few & Sung, Hao-Chang, 2021. "Product market competition and real activities manipulation: Theory and implications," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 192-205.
    • Handle: RePEc:eee:reveco:v:74:y:2021:i:c:p:192-205
    DOI: 10.1016/j.iref.2021.01.019
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    2. Kęstutis Peleckis, 2022. "Application of the Fuzzy VIKOR Method to Assess Concentration and Its Effects on Competition in the Energy Sector," Energies, MDPI, vol. 15(4), pages 1-16, February.

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    More about this item

    Keywords

    Earnings target; Real activities manipulation; Cournot competition; One-sided; Incomplete information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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