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On the nonlinear relation between product market competition and earnings quality

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  • Ying Guo
  • Boochun Jung
  • Yanhua Sunny Yang

Abstract

The literature documents conflicting results regarding the influence of product market competition on earnings quality. We extend this stream of literature by incorporating competition’s effect on both the opportunities and the incentives to manage earnings. The combination of both effects results in a nonlinear relation between product market competition and earnings quality. At low competition levels, additional information associated with one more rival helps reveal earnings irregularity and deter earnings management to a larger extent than its effect on the incentives to manage earnings, suggesting a positive relation between competition and earnings quality. At high competition levels, the latter effect dominates the former. We thus predict a positive (negative) relation between competition and earnings quality at low (high) competition levels. Consistent with our hypothesis, we document an inverted U-shaped relation between earnings quality and product market competition.

Suggested Citation

  • Ying Guo & Boochun Jung & Yanhua Sunny Yang, 2019. "On the nonlinear relation between product market competition and earnings quality," Accounting and Business Research, Taylor & Francis Journals, vol. 49(7), pages 818-846, November.
    • Handle: RePEc:taf:acctbr:v:49:y:2019:i:7:p:818-846
    DOI: 10.1080/00014788.2019.1586515
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    Cited by:

    1. Pallab Kumar Biswas & Dinithi Ranasinghe & Eric K. M. Tan, 2023. "Impact of product market competition on real activity manipulation: Moderating role of managerial ability," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 247-275, March.
    2. Babar, Md. & Habib, Ahsan, 2021. "Product market competition in accounting, finance, and corporate governance: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 73(C).

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