Market competition, earnings management, and persistence in accounting profitability around the world

Paul Healy (), George Serafeim, Suraj Srinivasan and Gwen Yu ()
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Paul Healy: Harvard Business School
George Serafeim: Harvard Business School
Suraj Srinivasan: Harvard Business School
Gwen Yu: Harvard Business School

Review of Accounting Studies, 2014, vol. 19, issue 4, No 1, 1308 pages

Abstract: Abstract We examine how cross-country differences in product, capital, and labor market competition, as well as earnings management affect mean reversion in accounting return on assets. Using a sample of 48,465 unique firms from 49 countries, we find that accounting returns mean revert faster in countries where there is more product and capital market competition, as predicted by economic theory. Country differences in labor market competition and earnings management are also related to mean reversion in accounting returns—but the relation varies with firm performance. Country labor competition increases mean reversion when unexpected returns are positive but slows it when unexpected returns are negative. Accounting returns in countries with higher earnings management mean revert more slowly for profitable firms and more rapidly for loss firms. Thus earnings management incentives to slow or speed up mean reversion in accounting returns are accentuated in countries where there is a high propensity for earnings management. Overall, these findings suggest that country factors explain mean reversion in accounting returns and are therefore relevant for firm valuation.

Keywords: Earnings management; Mean reversion; Product market competition; Labor market competition; Return on assets (search for similar items in EconPapers)
JEL-codes: F37 G15 M41 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11142-014-9277-8

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