Product market competition and real activities manipulation: Theory and implications

Cheng Few Lee and Hao-Chang Sung

International Review of Economics & Finance, 2021, vol. 74, issue C, 192-205

Abstract: We investigate how a firm manipulates its real activities in production to meet the earnings target in product market competition against its product-market rivals. We show that the equilibratory way to reach the earnings target is to set a higher first-period output level, reaching a higher short-term profit level. However, once the expected level of demand uncertainty is high, a firm will exploit this effect on its output choice by taking a mixed strategy and raising its short-term output level. This result suggests that one should consider longer-horizon paths of variables to detect opportunistic real activities manipulation.

Keywords: Earnings target; Real activities manipulation; Cournot competition; One-sided; Incomplete information (search for similar items in EconPapers)
JEL-codes: D82 L13 M41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:74:y:2021:i:c:p:192-205

DOI: 10.1016/j.iref.2021.01.019

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