Earnings Pressure and Competitive Behavior: Evidence from the U.S. Electricity Industry

This study examines the effect of pressure felt by management to meet or beat analysts' earnings forecasts on firms' behavior in oligopolistic output competition. We argue that firms under such earnings pressure strive to increase current profits by exploiting market power opportunities and tightening output, even though these acts could encourage rival output expansion. Using data from the U.S. electricity generation industry, we found that firms facing earnings pressure tended to restrict output in markets in which market structure and competitor characteristics were favorable for the exercise of market power, but their competitors tended to increase output in those markets.