A Study of the Relationship between Product Market Competition and Earnings Management

The product market competition is one of the factors contributing to earnings management. It forces managers to manipulate the firm's earning for opportunistic reasons. Intense competition in product market forces manages to manipulate corporate earnings so that by reduction of financial pressures via acquisition of low-cost external financial resources and reduction of capital costs, the product prices are lowered; this in turn gives the firm a competitive advantage by which it acquires a greater share of the market and raises above other competitors. On this basis, the present paper studies the relationship between intense competition in the product market and earnings management. As far as the dimensions of competition are concerned, market size, entry costs, and centralization are the three factors used to measure the competition in product market. In order to examine the hypotheses, the financial statements of 77 companies listed in Tehran stock exchange in 5 industry levels over the time period 2002-2011 are analyzed using regression analysis. The results reveal that factors of entry cost and industry concentration have a significant relationship with earnings management. However, in contrast with existing research literature, the relationship between market size and earnings management is not confirmed.