The effect of earnings co-movement on the probability of earnings manipulation: by considering product market competition

Accounting literature shows that firms’ managers have different incentives for earnings management and manipulation. However, the ability of managers to manipulate earnings or not, depends on the amount of information that can be obtained from other information sources in the industry. Earnings co-movement, which means firm’s earnings tends to move with other firms in same industry, can affect the involvement of managers with earnings manipulation activities. So, the aim of this study is to investigate the effect of earnings co-movement on the probability of earnings manipulation and also to investigate this relationship under the conditions of product market competition. The sample of this study consists of 134 listed companies in Tehran Stock Exchange during 2009 to 2020. The results of the first hypothesis test showed that earnings co-movement has a negative and significant effect on the probability of earnings manipulation. That is, in firm with higher earnings co- movement, the probability of earnings manipulation is less. The results of testing the second hypothesis also showed that in firms with low competition, compared to high competition, the relationship between earnings co-movement and the probability of earnings manipulation is stronger. Based on the sensitivity analysis test, the relationship between earnings co-movement and probability of earnings manipulation is stronger in companies with old age, compared to young ones.