IDEAS home Printed from https://ideas.repec.org/a/spr/eurasi/v14y2024i3d10.1007_s40821-024-00271-w.html
   My bibliography  Save this article

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

Author

Listed:
  • Jangho Gil

    (Monmouth University)

Abstract

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.

Suggested Citation

  • Jangho Gil, 2024. "The relationship between market competition and accrual earnings management: A cross-country study," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 14(3), pages 841-879, September.
    • Handle: RePEc:spr:eurasi:v:14:y:2024:i:3:d:10.1007_s40821-024-00271-w
    DOI: 10.1007/s40821-024-00271-w
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s40821-024-00271-w
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s40821-024-00271-w?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gus De Franco & S.P. Kothari & Rodrigo S. Verdi, 2011. "The Benefits of Financial Statement Comparability," Journal of Accounting Research, Wiley Blackwell, vol. 49(4), pages 895-931, September.
    2. Garen Markarian & Juan Santalo´, 2014. "Product Market Competition, Information and Earnings Management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 572-599, June.
    3. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    4. Sam Han & Tony Kang & Stephen Salter & Yong Keun Yoo, 2010. "A cross-country study on the effects of national culture on earnings management," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(1), pages 123-141, January.
    5. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    6. Nicholas Bloom & Raffaella Sadun & John Van Reenen, 2010. "Does Product Market Competition Lead Firms to Decentralize?," American Economic Review, American Economic Association, vol. 100(2), pages 434-438, May.
    7. Patricia M. Dechow & Richard G. Sloan & Amy P. Sweeney, 1996. "Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 1-36, March.
    8. Peter Cheng & Paul Man & Cheong H. Yi, 2013. "The impact of product market competition on earnings quality," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(1), pages 137-162, March.
    9. Landes, William M. & Posner, Richard A., 1981. "An economic theory of intentional torts," International Review of Law and Economics, Elsevier, vol. 1(2), pages 127-154, December.
    10. Ryan Lafond & Sugata Roychowdhury, 2008. "Managerial Ownership and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 101-135, March.
    11. Zhongju Liao & Manting Zhang, 2020. "The influence of responsible leadership on environmental innovation and environmental performance: The moderating role of managerial discretion," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(5), pages 2016-2027, September.
    12. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    13. Michael Neel, 2017. "Accounting Comparability and Economic Outcomes of Mandatory IFRS Adoption," Contemporary Accounting Research, John Wiley & Sons, vol. 34(1), pages 658-690, March.
    14. Deephouse, David L. & Newburry, William & Soleimani, Abrahim, 2016. "The effects of institutional development and national culture on cross-national differences in corporate reputation," Journal of World Business, Elsevier, vol. 51(3), pages 463-473.
    15. Joel Peress, 2010. "Product Market Competition, Insider Trading, and Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 65(1), pages 1-43, February.
    16. Lemma, Tesfaye T. & Negash, Minga & Mlilo, Mthokozisi & Lulseged, Ayalew, 2018. "Institutional ownership, product market competition, and earnings management: Some evidence from international data," Journal of Business Research, Elsevier, vol. 90(C), pages 151-163.
    17. Ferreira, Miguel A. & Matos, Pedro & Pereira, João Pedro & Pires, Pedro, 2017. "Do locals know better? A comparison of the performance of local and foreign institutional investors," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 151-164.
    18. DeFond, Mark & Hung, Mingyi & Trezevant, Robert, 2007. "Investor protection and the information content of annual earnings announcements: International evidence," Journal of Accounting and Economics, Elsevier, vol. 43(1), pages 37-67, March.
    19. Paulina Roszkowska & Domènec Melé, 2021. "Organizational Factors in the Individual Ethical Behaviour. The Notion of the “Organizational Moral Structure”," Humanistic Management Journal, Springer, vol. 6(2), pages 187-209, July.
    20. Yongtao Hong & Fariz Huseynov & Wei Zhang, 2014. "Earnings Management and Analyst Following: A Simultaneous Equations Analysis," Financial Management, Financial Management Association International, vol. 43(2), pages 355-390, June.
    21. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
    22. Datta, Sudip & Iskandar-Datta, Mai & Singh, Vivek, 2013. "Product market power, industry structure, and corporate earnings management," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3273-3285.
    23. Francis, Jennifer & Schipper, Katherine & Vincent, Linda, 2005. "Earnings and dividend informativeness when cash flow rights are separated from voting rights," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 329-360, June.
    24. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    25. Jesse A. Ellis & C. Edward Fee & Shawn E. Thomas, 2012. "Proprietary Costs and the Disclosure of Information About Customers," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 685-727, June.
    26. Harris, MS, 1998. "The association between competition and managers' business segment reporting decisions," Journal of Accounting Research, Wiley Blackwell, vol. 36(1), pages 111-128.
    27. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "The effect of international institutional factors on properties of accounting earnings," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 1-51, February.
    28. Tang, Yuehua, 2018. "When does competition mitigate agency problems?," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 258-274.
    29. Mary Barth, 2013. "Global Comparability in Financial Reporting: What, Why, How, and When?," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 1(1), pages 2-12.
    30. Ali, Ashiq & Klasa, Sandy & Yeung, Eric, 2014. "Industry concentration and corporate disclosure policy," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 240-264.
    31. Kim, Young Sang & Kim, Yura & Yi, Ha-Chin, 2021. "Vice or virtue? The impact of earnings management on bank loan agreements," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 303-324.
    32. Laksmana, Indrarini & Yang, Ya-wen, 2014. "Product market competition and earnings management: Evidence from discretionary accruals and real activity manipulation," Advances in accounting, Elsevier, vol. 30(2), pages 263-275.
    33. Li Yuan & Robert Chia & Jonathan Gosling, 2023. "Confucian Virtue Ethics and Ethical Leadership in Modern China," Journal of Business Ethics, Springer, vol. 182(1), pages 119-133, January.
    34. Ricardo Malagueño & Chad Albrecht & Christopher Ainge & Nate Stephens, 2010. "Accounting and corruption: a cross‐country analysis," Journal of Money Laundering Control, Emerald Group Publishing Limited, vol. 13(4), pages 372-393, October.
    35. Zhang, Jinjin & Chen, Huili & Zhang, Pengdong & Jiang, Min, 2022. "Product market competition and the value of corporate cash: An agency theory explanation," International Review of Financial Analysis, Elsevier, vol. 84(C).
    36. Jong‐Hag Choi & Sunhwa Choi & Linda A. Myers & David Ziebart, 2019. "Financial Statement Comparability and the Informativeness of Stock Prices About Future Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 36(1), pages 389-417, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Babar, Md. & Habib, Ahsan, 2021. "Product market competition in accounting, finance, and corporate governance: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 73(C).
    2. Callen, Jeffrey L. & Fang, Xiaohua & Zhang, Wenjun, 2020. "Protection of proprietary information and financial reporting opacity: Evidence from a natural experiment," Journal of Corporate Finance, Elsevier, vol. 64(C).
    3. Aboud, Ahmed & Roberts, Clare, 2018. "Managers’ segment disclosure choices under IFRS 8: EU evidence," Accounting forum, Elsevier, vol. 42(4), pages 293-308.
    4. El Diri, Malek & Lambrinoudakis, Costas & Alhadab, Mohammad, 2020. "Corporate governance and earnings management in concentrated markets," Journal of Business Research, Elsevier, vol. 108(C), pages 291-306.
    5. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    6. Tingting Zhang & Weiqiang Zeng & Ruohan Zhong & Yanxi Li, 2017. "Industry competition in China: an external governance mechanism or an external incentive," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 31(2), pages 123-136, November.
    7. Susana Callao & José I. Jarne & David Wróblewski, 2019. "A New Perspective on Earnings Management in Emerging European Countries: Investigation on Environmental Factors that Explain Differences in Earnings Management," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 7(2), pages 59-81.
    8. Tang, Hui-Wen & Chen, Anlin, 2020. "How do market power and industry competition influence the effect of corporate governance on earnings management?," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 212-225.
    9. Justin Y. Jin, 2013. "Investor Attention and Earnings Management around the World," Accounting Perspectives, John Wiley & Sons, vol. 12(2), pages 165-187, June.
    10. Liang, Chuchu, 2024. "Advertising rivalry and discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 77(1).
    11. Belén Gill de Albornoz Noguer & Simona Rusanescu, 2017. "Foreign ownership and financial reporting quality in private subsidiaries," Working Papers. Serie EC 2017-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    12. Fargher, Neil & Wee, Marvin, 2019. "The impact of Ball and Brown (1968) on generations of research," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 55-72.
    13. Pierre Bonetti & Antonio Parbonetti & Michel Magnan, 2013. "The Influence of Country- and Firm-Level Governance on Financial Reporting Quality: Revisiting the Evidence," CIRANO Working Papers 2013s-03, CIRANO.
    14. Yinghua Li & Yupeng Lin & Liandong Zhang, 2018. "Trade Secrets Law and Corporate Disclosure: Causal Evidence on the Proprietary Cost Hypothesis," Journal of Accounting Research, Wiley Blackwell, vol. 56(1), pages 265-308, March.
    15. Fosu, Samuel & Danso, Albert & Agyei-Boapeah, Henry & Ntim, Collins G. & Murinde, Victor, 2018. "How does banking market power affect bank opacity? Evidence from analysts' forecasts," International Review of Financial Analysis, Elsevier, vol. 60(C), pages 38-52.
    16. Liangliang Jiang & Ross Levine & Chen Lin, 2016. "Competition and Bank Opacity," The Review of Financial Studies, Society for Financial Studies, vol. 29(7), pages 1911-1942.
    17. Dambra, Michael & Field, Laura Casares & Gustafson, Matthew T., 2015. "The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision," Journal of Financial Economics, Elsevier, vol. 116(1), pages 121-143.
    18. Marra, Antonio & Mazzola, Pietro & Prencipe, Annalisa, 2011. "Board Monitoring and Earnings Management Pre- and Post-IFRS," The International Journal of Accounting, Elsevier, vol. 46(2), pages 205-230, June.
    19. Haw, In-Mu & Hu, Bingbing & Lee, Jay Junghun, 2015. "Product market competition and analyst forecasting activity: International evidence," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 48-60.
    20. Joseph P.H. Fan & Feng Guan & Zengquan Li & Yong George Yang, 2014. "Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 831-866, September.

    More about this item

    Keywords

    Market competition; Managerial financial reporting behavior; Accrual earnings management; Financial reporting environments; Country-level factors;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:eurasi:v:14:y:2024:i:3:d:10.1007_s40821-024-00271-w. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.