Article2016

Competitive pressure and managerial decisions

15 citations0/0 files storedChinese Management Studies

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Purpose This study aims to examine the impact of product market competition (PMC) from existing rivals and potential market entrants on earnings quality (EQ) in China. Design/methodology/approach This study examines the impact of PMC on EQ by using the EQ measure of Kothari et al. (2005), and it uses measures for competition from existing and potential rivals. This study analyzed Chinese firms for the period of 2000-2014 and also examined the impact of International Financial Reporting Standards (IFRS) adoption and state ownership on the relationship between PMC and EQ. Findings This study found a positive relationship between PMC and EQ. It also documents that competition from existing rivals does not improve EQ by reducing real activity manipulation, but competition from potential entrants does. The findings propose that market competition from existing rivals is a relevant factor for determining EQ before and after IFRS adoption, but competition from potential entrants improves EQ only after IFRS adoption. Moreover, the results suggest that market competition plays no role in improving the EQ of state-owned enterprises (SOEs). Originality/value The results support the argument that PMC acts as a governance mechanism and influences managerial decisions regarding financial reporting. Our study also helps to understand the impact of change in the regulatory regime, i.e. IFRS adoption, on the relationship between PMC and EQ. This study also helps demonstrate the impact of competition on management decisions with respect to the EQ of SOEs.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1993Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency 2005Performance matched discretionary accrual measures 2003Earnings Management through Real Activities Manipulation 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 2010Understanding earnings quality: A review of the proxies, their determinants and their consequences 2006Politically Connected Firms

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