Earnings Pressure and Competitive Behavior: Evidence from the U.S. Electricity Industry

Yu Zhang · Javier Gimeno

121 citations0/0 files storedAcademy of Management Journal

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Merger and Competition Analysis Corporate Finance and Governance Auditing, Earnings Management, Governance

Abstract

This study examines the effect of pressure felt by management to meet or beat analysts' earnings forecasts on firms' behavior in oligopolistic output competition. We argue that firms under such earnings pressure strive to increase current profits by exploiting market power opportunities and tightening output, even though these acts could encourage rival output expansion. Using data from the U.S. electricity generation industry, we found that firms facing earnings pressure tended to restrict output in markets in which market structure and competitor characteristics were favorable for the exercise of market power, but their competitors tended to increase output in those markets.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1979Prospect Theory: An Analysis of Decision under Risk 1988Prospect theory: An analysis of decision under risk 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 2019American Economic Review 1991Earnings Management During Import Relief Investigations 1963A Behavioral Theory of the Firm 2005The economic implications of corporate financial reporting

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