Product market power and management’s action to avoid earnings disappointment

Mitra, Santanu; Hossain, Mahmud; Jain, Pankaj

doi:10.1007/s11156-012-0324-x

Cited by 18 publications

(13 citation statements)

References 35 publications

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“…The magnitude of earnings management is greater for firms having a higher level of cash flow volatility ( CFOVOL ). Surprisingly, we find a positive association between cash flow from operations ( CFO ) and earnings management, which is consistent with Mitra, Hossain, and Jain (). We do not find any relation between audit firm tenure and abnormal accruals.…”

Section: Resultssupporting

confidence: 91%

Impact of the disclosure of audit engagement partners on audit quality: Evidence from the USA

Dao

Liu

2019

Int J Auditing

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The debate concerning the recent regulation in the USA mandating accounting firms to disclose engagement partners' identity is ongoing. We examine the impact of the Public Company Accounting Oversight Board's (PCAOB's) requirement of disclosing engagement partners' names on Form AP on the quality of audit engagements. Using two measures of audit quality (abnormal accruals and the probability of detecting material weaknesses in internal control), we find that disclosing engagement partners' names is associated with a lower level of abnormal accruals and a higher probability of accounting firms detecting material weaknesses in internal control. Our study extends the contemporary research on the disclosure of engagement partners' identification by providing additional evidence to the literature on this issue in the U.S. setting. Our study also provides evidence supporting the PCAOB's perception that this disclosure leads to higher audit quality.

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Section: Resultssupporting

confidence: 91%

Impact of the disclosure of audit engagement partners on audit quality: Evidence from the USA

Dao

Liu

2019

Int J Auditing

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“…Our results, which imply that deregulation of product markets in Europe, which has resulted in increased product market competition, has had a negative effect on capital market efficiency to some extent, provide important insights into the interrelation between product and capital markets around the world. In line with this contribution, our study also adds to recent studies that document the effects of product market competition on numerous firm-level attributes, including cooperate innovation, outsourcing choices, earnings management, asymmetric cost behaviors, stock-based compensation policies, bond yields, and analyst coverage (Mitra et al 2013 Second, this study answers a call from prior research (Rajan and Zingales 2003;Peress 2010) by showing that policy changes that aim to improve the efficiency of capital markets, such as the mandatory adoption of IFRS and the related capital market reforms in EU, can help alleviate the negative effect of product market competition on stock price informativeness. This evidence provides implications for policymaking to suggest that policies can be designed to enhance product market competition and to facilitate the efficient allocation of capital in equity markets.…”

Section: Introductionsupporting

confidence: 58%

Product market competition, stock price informativeness, and IFRS adoption: evidence from Europe

Wang

Forst

2020

Rev Quant Finan Acc

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This study examines whether and how policy changes that aim to improve market efficiency, specifically the mandatory adoption of International Financial Reporting Standards (IFRS), influence the relation between product market competition and stock price informativeness. Using a sample of European firms, we find a negative association between product market competition and stock price informativeness as evidenced by larger (smaller) stock price changes surrounding earnings announcements for firms facing more (less) product market competition. These findings are consistent with prior studies examining the U.S. capital market. We further find that IFRS adoption alleviates the negative association. This positive effect is more pronounced among firms domiciled in countries with stronger legal enforcement and among smaller firms. Our results provide insights into the interrelation between product and capital markets in the European setting. More importantly, our results highlight the importance of policy changes, which aim to improve market efficiency, in influencing the relation between the two markets and document the benefit of IFRS adoption in mitigating the negative competition-informativeness relation.

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“…Thus, the findings complement prior studies that find accounting standards, legal institutions, and enforcement to affect accounting properties (eg, Ball et al., 2003; Daske et al., 2008). Because it is unclear whether earnings management increases or decreases accounting comparability, this study also complements recent studies that examine the link between product market competition and earnings management by exploring another important characteristic of financial statements—accounting comparability (Datta et al., 2013; Laksmana & Yang, 2014; Lemma et al., 2018; Mitra et al., 2013; Shi et al., 2018).…”

Section: Discussionmentioning

confidence: 81%

“…Along this line, a few recent studies investigate whether and how product market competition affects earnings management (Datta et al., 2013; Laksmana & Yang, 2014; Lemma et al., 2018; Mitra et al., 2013; Shi et al., 2018). While increased product market competition may mitigate agency problems between managers and shareholders, and hence, reduce earnings management, there is a potential dark side of product market competition, which may lead to the spread of unethical behavior such as earnings management (Shleifer, 2004).…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Product differentiation and financial statement comparability

Cheng

2021

J Corp Accounting Finance

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This study empirically examines whether and how product differentiation affects the comparability of financial statements. Product differentiation captures the dissimilarities in business environments and operations between a firm and its peers, which naturally affects the firm's accounting comparability. Product differentiation also represents an important dimension of product market competition, which may lead to either higher or lower financial statement comparability. Using a sample of 5351 non‐financial US firms over the period of 2000–2019, my results provide consistent evidence that product differentiation decreases financial statement comparability. The results on other dimensions of product market competition also consistently show that accounting comparability decreases as product market competition weakens.

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Product market power and management’s action to avoid earnings disappointment

Cited by 18 publications

References 35 publications

Impact of the disclosure of audit engagement partners on audit quality: Evidence from the USA

Impact of the disclosure of audit engagement partners on audit quality: Evidence from the USA

Product market competition, stock price informativeness, and IFRS adoption: evidence from Europe

Product differentiation and financial statement comparability

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