Product Market Competition and Real Earnings Management to Meet or Beat Earnings Benchmarks

2014 ◽  
Author(s):  
Alex Young
Keyword(s):  
Earnings Management ◽  
Market Competition ◽  
Product Market ◽  
Product Market Competition ◽  
Real Earnings Management ◽  
Earnings Benchmarks

Product market competition, R&D investment choice, and real earnings management

2017 ◽  
Vol 25 (3) ◽  
pp. 296-312 ◽  
Author(s):  
Hsiao-Fen Hsiao ◽  
Szu-Lang Liao ◽  
Chi-Wei Su ◽  
Hao-Chang Sung
Keyword(s):  
Earnings Management ◽  
Private Information ◽  
Market Competition ◽  
Product Market ◽  
Economic Benefits ◽  
Product Market Competition ◽  
Real Earnings Management ◽  
Theoretic Model ◽  
Accounting System ◽  
Content Type

Purpose Recent studies in the accounting literature have investigated the economic consequences of R&D capitalization. Discretionary R&D capitalization for target beating can be characterized as a firm signaling private information on its future economic benefits or as opportunistic earnings management. R&D capitalization also has an impact on a firm’s marginal costs and product market competition. The purpose of this paper is to address how firms choose R&D levels for the purpose of meeting or beating their earnings targets and how this influences sequential product market competition. Design/methodology/approach The authors study this issue in a stylized game-theoretic model where R&D choices of a firm are not only strategically made but also used to convey proprietary information to its rival. The model provides a rationale for a firm distorting its R&D level to earn more profits and meet its earnings target. Findings The equilibrium result indicates that before the realization of common cost shock, a firm can influence the output of its accounting system (i.e. meeting an earnings target) through adjusting its R&D choices. This firm will overinvest in R&D, and this will give an opportunity to create some reserves to be used later to earn a higher profit and reach the earnings target. Originality/value This paper contributes to the research on real earnings management in terms of how R&D capitalization affects a firm’s R&D choices by influencing the output of its accounting system through adjusting its R&D choices and the strategic impact of those choices.

Product Market Competition’s Effect on Earnings Management When Audit Quality Is Endogenous: Theory and Evidence

2019 ◽  
Vol 15 (3) ◽  
Author(s):  
Andrew Samuel ◽  
Jeremy Schwartz
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Structural Parameters ◽  
Market Competition ◽  
Product Market ◽  
Product Market Competition ◽  
Theoretic Model ◽  
Industry Competition ◽  
Game Theoretic

Abstract A long standing question is whether product market competition disciplines a firm’s incentive to engage in earnings management. This paper argues that this question cannot be investigated adequately without accounting for the quality of firms’ auditors, because auditors affect the probability of discovering earnings management. Since firms choose their auditor, a non-compliant firm can alter its own probability of being detected. Consequently, a firm’s decision to manage earnings is a function of its auditor’s quality, which is itself endogenously chosen by the firm. To study this issue we develop a game-theoretic model that captures the potential inter-relationship between industry competition, the firms’ choice of audit quality, and compliance with accounting regulations (or the degree of earnings manipulation). We show that the link between financial compliance and product market competition is affected by the endogenously chosen audit quality. We estimate this model’s structural parameters and find that greater competition reduces both compliance and the demand for high quality audits.

Oligopoly, Disclosure, and Earnings Management

2010 ◽  
Vol 85 (4) ◽  
pp. 1191-1214 ◽  
Author(s):  
Mark Bagnoli ◽  
Susan G. Watts
Keyword(s):  
Earnings Management ◽  
Lower Cost ◽  
Market Competition ◽  
Product Market ◽  
Industry Structure ◽  
Information Environment ◽  
Product Market Competition ◽  
Total Production ◽  
Product Price ◽  
Financial Reports

ABSTRACT: We examine how biased financial reports (managed earnings) affect product market competition and how product market competition affects incentives to bias financial reports in a model with fully rational firms. We find that Cournot competitors bias their reports to create the impression that their costs are lower than they actually are. This bias leads to lower total production and a higher product price, even though each firm fully understands its rival’s incentives to bias its financial reports. The magnitude of the bias is larger when firms compete in more profitable product markets and smaller when the firm can extract more information about its rival’s costs from its own. When the costs of misreporting are asymmetric, the lower-cost firm engages in more earnings management than its rival, produces more than it would in a full-information environment, and earns greater profits. Our analysis leads to new, testable relations among earnings management, reported and actual earnings, and industry structure.

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