Product Market Competition and Accounting Information Quality

Bushman and Smith (2001) point out that a fundamental objective of governance research in accounting is to provide evidence on the extent to which information provided by financial accounting systems mitigate agency problems due to the separation of managers and investors. In the presence of proprietary and political costs, firms may opt to protect their competitive advantages by exercising control over what information is voluntarily disclosed. However, empirical evidence in the literature mainly centers on the quantity aspect of disclosure such as the frequency and horizons of forecasts (Ali et al., 2010), number of segments to be reported (Harris, 1998; Botosan and Stanford, 2005) and the pervasiveness of forecasting in the industry (Li, 2010). As far as accounting quality is concerned, prior studies have focused on the choice of income-deflating accounting policies (Hagerman and Zmijewski, 1979) and forecast accuracy (Ali et al., 2010; Li, 2010). Cheng et al. (2013) suggest that firms from concentrated are associated with higher disclosure costs and are more likely to offer financial information of lower quality to avoid the attention of rivals and sanctions from the public. On the other hand, some of the researchers (Gal-Or, 1985; Gertner et al., 1988) believe that increasing competition in the market is reduced for financial information quality. Following prior research in accounting, accruals quality and disclosure quality were employed as a proxy for accounting information quality. Consequently, the following question was raised: “Is there a significant relationship between product market competition and accounting information quality?” Hence, the main objective of this study is to investigate product market competition on the accounting information quality for the listed firms in Tehran Stock Exchange (TSE). Research Hypotheses: Based on the theoretical literature and the conducted studies, research hypotheses were developed as follows: First main hypothesis: Product market competition affects accounting information quality. The minor hypotheses are: H1: Herfindahl-Hirschman index affects accruals quality. H2: Herfindahl-Hirschman index affects disclosure quality. H3: Lerner index affects accruals quality. H4: Lerner index affects disclosure quality. H5: Modified Lerner index affects accruals quality. H6: Modified Lerner index affects disclosure quality. Second main hypothesis: There are significant differences between accounting information quality of firms operating in different industries. The minor hypotheses are: H1: There are significant differences between accruals quality of firms operating in different industries. H2: There are significant differences between disclosures quality of firms operating in different industries. Third main hypothesis: There are significant differences between product market competitions of firms operating in different industries. The minor hypotheses are: H1: There are significant differences between Herfindahl-Hirschman indexes of firms operating in different industries. H2: There are significant differences between Lerner indexes of firms operating in different industries. H3: There are significant differences between modified Lerner indexes of firms operating in different industries. The research methodology is a quantitative research that adopts the scientific method and empirical evidence, based on hypotheses and ex-post research designs. This type of research is utilized when criteria data quantitative are used. In this research, data of 73 companies are analyzed for the period of 2004-2013. The related data was collected through observation of Iranian database of the Tehran Stock Exchange (Tadbir Pardaz), annual data files and accompanying notes as found on www.rdis.com. For statistical analysis and to test hypotheses, descriptive statistics (i.e., mean, maximum, minimum and standard deviation) and inferential statistics (i.e., unit root test, enter multiple linear regression and analysis of variance) are used. Collected data was calculated via the Excel software and was analyzed using Eviews-7 and also SPSS-19. Herfindahl-Hirschman, Lerner, and Modified Lerner indexes were employed as a proxy for the product market competition. Additional accruals quality as it is introduced by Dechow and Dichev (2002) model and disclosure quality index was used as a proxy for accounting information quality. The results of this research show that at a confidence level of 95%, there is a significant positive relationship between criteria of the product market competition and accruals quality (earnings quality). Also, the result suggested that there is a significant positive relationship between the criteria of product market competition and the disclosure quality. Furthermore, based on the analysis of variance, the type of the industry is an effective factor influencing accounting information quality and product market competition.Discussion and Product market competition is an important determinant of corporate decisions, and in particular on decisions about a firm's disclosure strategy. The goal of this research was to study the effects of product market competition on the accounting information quality of listed companies in the TSE. This study would enhance our understanding of how firms make their financial disclosure decisions when facing various degrees of the product market competition. Furthermore, the results might be able to resolve the seemingly conflicting predictions from prior analytical models and will provide some implications for regulatory agencie's future policy setting. One important suggestion is that, when there is a fierce competition both at the firm and at industry level, more disclosure should be attempted. In general considering the potential strategic choice of the firms in voluntary disclosure, the level of a mandatory disclosure can be tuned more to the less competitive industry where investors are less likely to receive timely financial reporting of high quality.