How does competition shape managerial decisions? Product market competition and financial statement comparability

Muhammad Ansar Majeed · Chao Yan · Muhammad Zubair Tauni

40 citations0/0 files storedManagement Decision

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and XBRL

Abstract

Purpose The purpose of this paper is to explore the effects of competitive pressure on financial statements’ comparability (comparability) by analyzing various dimensions of competition. Design/methodology/approach The authors study the effect of competition on comparability using the comparability measure of De Franco et al. (2011) and various proxies for competition, competition from existing/potential rivals and non-price competition (NPC). Findings This study documents that competition is positively associated with comparability, and this effect is more (less) pronounced for industry followers (leaders). The authors also document that competition from existing rivals enhances comparability, but competition from potential entrants does not. Moreover, NPC is also a significant determinant of comparability. Furthermore, the competition from existing/potential rivals plays no significant role in the production of comparable financial statements in state-owned enterprises. The results are robust to alternative measures of comparability and methodological approaches. Originality/value This study is the first empirical study that documents a new channel (comparability) through which competition affects financial statements. The findings support the argument that competitive pressure acts as a governance mechanism, disciplines management and increases comparability leading to lower information asymmetry (governance view). However, the findings contest the argument that higher competition motivates managers to withhold information (proprietary cost hypothesis). By examining the effect of state ownership, this study might also help to characterize the effects of changes in corporate objectives on managerial decisions related to financial reporting.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 2005Performance matched discretionary accrual measures 1985The Structure of Corporate Ownership: Causes and Consequences 1985Positive Accounting Theory 2003Earnings management and investor protection: an international comparison 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 1982Moral Hazard in Teams

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