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Product Market Competition, Information and Earnings Management

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  • GAREN MARKARIAN

    (Instituto de Empresa)

  • Juan Santaló

    (Instituto de Empresa)

Abstract

We study the effect of product market competition on the incentives to engage in earnings manipulation and we find that they crucially depend on the level of visibility of firm real activity in the marketplace. If investors can perfectly observe real firm output and sales, then CEOs are forced to act in the marketplace in a consistent manner with the earnings they are reporting. We show in a simple model how this is too expensive in more competitive markets and therefore competition should reduce rather than increase earnings manipulation. On the contrary, if investors and analysts cannot observe firm real output in the marketplace we show how manipulating earnings might be particu

Suggested Citation

  • GAREN MARKARIAN & Juan Santaló, 2010. "Product Market Competition, Information and Earnings Management," Working Papers Economia wp10-03, Instituto de Empresa, Area of Economic Environment.
    • Handle: RePEc:emp:wpaper:wp10-03
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