Market power, competition and earnings management: accrual-based activities

Hai-Yen Chang, Li-Heng Liang and Hui-Fun Yu

Journal of Financial Economic Policy, 2019, vol. 11, issue 3, 368-384

Abstract: Purpose - This study aims to understand the impact of market power and competition on earnings management, particularly discretionary accruals, in the Chinese and Taiwanese tourism industries. China and Taiwan differ not only in their political and social systems but also in their economic systems. The research aims to provide managers and investors with stock selection strategy in the decision-making process. Design/methodology/approach - Accounting data consisted of 60 publicly traded travel companies in China and Taiwan from 2000 to 2014. Methodology included correlation matrix for the variables, univariate and multivariate regression and competition analysis. Findings - Based on empirical results, the authors found a significant negative correlation between market power and discretionary accruals and market concentration (or lower market competition) and discretionary accruals in both the Chinese or Taiwanese markets. Although the Chinese travel companies enjoyed higher market power and market concentration, they engaged in less earnings manipulation than their Taiwanese counterparts as a result of the Chinese Government regulation. Research limitations/implications - Based on listed travel companies, generalization of the research results to entire tourism industry is limited. This study compares the travel companies’ practices of smoothing out earnings between China and Taiwan, thus helping managers and investors in making their financing, investment decisions. Originality/value - This research contributes to the earnings management literature by examining a specific industry of tourism. This paper is original in two ways. The authors linked market power and market competition with earnings management simultaneously and then compared the Chinese and Taiwanese tourism industries in manipulating earnings.

Keywords: Investment decisions; Financing policy; Economics of regulation (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-08-2018-0108

DOI: 10.1108/JFEP-08-2018-0108

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