Product market competition and earnings management: A firm-level analysis

In this paper, we employ a firm-level measure of product market competition constructed from the textual analysis of firms' 10-K filings to examine the relationship between managers' perceived competition pressure and earnings management. We find that accounting irregularities and accrual-based earnings management are positively related to product market competition. This finding is consistent with the notion that competition pressure increases managerial incentives to manage earnings, due to their career concerns. We also find that real earnings management is negatively related to product market competition. This finding suggests that real earnings management involves actions that decrease firms' competitiveness and thus is costly for firms confronted with high competition pressure.