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Product market power, industry structure, and corporate earnings management

Sudip Datta, Iskandar-Datta, Mai and Vivek Singh ()

Journal of Banking & Finance, 2013, vol. 37, issue 8, 3273-3285

Abstract: This is the first study to establish a link between product market power of firms and the degree of earnings management. We hypothesize and document a significant and robust association between (a) a firm’s product market pricing power and its degree of earnings management, and (b) industry competitiveness and the degree of earnings management in the industry. Our study reveals that firms with inferior product market pricing power engage in greater discretionary earnings accruals, adding a new dimension to our understanding of the transparency and informativeness of firms’ financial statements. These findings are mirrored at the industry level where we document that more competitive industries are associated with greater earnings manipulation. The empirical evidence has direct implication on the informativeness and earnings quality of firms based on their product market power and competitiveness.

Keywords: Product market power; Industry structure and competition; Earnings management; Discretionary accruals management (search for similar items in EconPapers)
JEL-codes: G30 L11 M4 M41 (search for similar items in EconPapers)
Date: 2013
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