The Relationship between Product Market Competition and Earnings Management

The theoretical literature is inconclusive on whether competition is beneficial or harmful to firms. Some studies show that competition disciplines managerial behavior by providing additional information for performance evaluation. In contrast، another stream of research shows that competition increases managerial slack. This study investigates whether and how a firm’s real earnings management via real transaction structuring activities (REM) is influenced by the extent of product market competition. Thus، the major purpose of this paper is investigating and analyzing the relationship between proxies of real earnings management and product market competition. This study is descriptive-correlation based on panel data analyzing. The 99 firms existing in Tehran Stock Exchange has been selected as sample for time period 2007-2011. To examine the relationship between product market competition and earnings management through real activities، multiple regression models are used. Also Tobin Q index is used for measuring the product market competition. The results show that there is a significant positive relationship between proxies of real earnings management and product market competition. This indicates increase in earnings management by increasing product market competition، which also leads to decrease in the quality of earnings.