What is earnings management fraud?
The story, whether factual or fictitious, does demonstrate how a company’s reported earnings may not necessarily be an objective measure of economic reality. Earnings management becomes fraud when companies intentionally provide materially misstated information.
What is product/market competition?
Product market competition acts as an important disciplinary mechanism, influencing the overall costs of monitoring. Firms in competitive industries have incentives to use normal RPTs to reduce transaction costs. This implies that the influence of controlling shareholders is smaller in firms in competitive industries.
How does product market competition affect the quality of corporate governance?
We find that firms in competitive industries or with low market power tend to have weak corporate governance structures. The overall evidence suggests that product market competition has a substantial impact on corporate governance and that it substitutes for corporate governance quality.
What are the consequences of competition in markets?
Competition among companies can spur the invention of new or better products, or more efficient processes. Firms may race to be the first to market a new or different technology. Innovation also benefits consumers with new and better products, helps drive economic growth and increases standards of living.
What is the difference between earnings management and fraud?
Fraud has the same objective as earnings management, but differs from earnings management in that fraud is outside of generally accepted accounting principles (GAAP), whereas, earnings management is within GAAP (Erickson, Hanlon, & Maydew, 2006).
What are examples of earnings management?
Examples of Earnings Management For example, assume a furniture retailer uses the last-in, first-out (LIFO) method to account for the cost of inventory items sold. FIFO creates a lower cost of goods sold expense and, therefore, higher profit so the company can post higher net income in the current period.
What are examples of product markets?
Product markets refer to markets in which all kinds of goods and services are made and traded, for example the market for airline travel; smart-phones, new cars; pharmaceutical products and the markets for financial services such as banking, mortgages and pensions.
What do you mean by zero competition market?
In economic competition theory, the zero-profit condition is the condition that occurs when an industry or type of business has an extremely low (near-zero) cost of entry to or exit from the industry. More and more firms will enter until the economic profit per firm has been driven down to zero by competition.
What happens when markets lack competition?
If there was no competition in the markets, companies woud neglect technological development and cost reduction efforts. Price and service would become more advantageous to companies, and consumers would result in no receipt of benefits. We would have to buy the same product at a high price, wherever we went shopping.
How does competition affect a business negatively?
Competition can create an environment where employees are focused more on their competitors than on their own work. Competition can also breed an unhealthy outlook on the work/life balance, and actually create an imbalance.
How is earnings management related to product competition?
We also find that real earnings management is negatively related to product market competition. This finding suggests that real earnings management involves actions that decrease firms’ competitiveness and thus is costly for firms confronted with high competition pressure.
How are accounting irregularities related to product market competition?
We find that accounting irregularities and accrual‐based earnings management are positively related to product market competition. This finding is consistent with the notion that competition pressure increases managerial incentives to manage earnings, due to their career concerns.
How does product market competition reduce agency problems?
We show that product market competition reduces agency problems by curtailing misleading earnings management and improving earnings informativeness.
Why are forced earnings restatements less common in competitive market?
Furthermore, forced earnings restatements and security fraud lawsuits are less common in such markets. When firms engage in misleading upward earnings management, in a competitive market they are more harshly punished by the stock market when the market learns about the misleading management.