The relationship between market competition and accrual earnings management: A cross-country study

This study aims to address the mixed evidence in the extant literature regarding the relationship between market competition and accrual earnings management. We explore this relationship in an international context using a sample comprising all listed companies from 32 countries using International Financial Reporting Standards from 2005 to 2022, totaling 34,931 observations. Our study uncovers a positive relationship between market competition and accrual earnings management in weak financial reporting environments, while a negative association is observed in strong financial reporting environments. The inconsistency in prior findings is attributed to variations in numerous factors that constitute the financial reporting environments. In addition, our cross-country analysis highlights that the factor Informal Institutions, encompassing cultural values and social norms, exerts the most significant impact on accrual earnings management under highly competitive pressure. Our main results withstand rigorous testing for endogeneity concerns. Based on our results, we recommend prioritizing the enhancement of cultural values and social norms in countries with weak financial reporting environments, rather than relying on regulatory measures, to curtail accrual earnings management in competitive markets or industries.