The Effect of Product Market Competition on Real Earnings Management

Chih-Hsien Liao and Tawei Wang

This study examines whether product market competition constrains managers’ real earnings management behavior. Using four different competition measures based on industry concentration and market size, we find that firms facing higher product market competition conduct lower levels of real earnings management. We also find that this negative effect is more pronounced in industries with higher litigation risk. The findings support the argument that product market competition serves as an efficient disciplinary corporate governance mechanism.

Key Words: Product market competition, real earnings management, Herfindahl–Hirschman Index

JEL Codes: M41

DOI : http://dx.doi.org/10.21102/jbpr.2015.07.101.01