Managers’ perception of product market competition and earnings management: a textual analysis of firms’ 10-K reports

Abstract

Purpose

In this study, the author examines the effect of managers’ perception of product market competition on accruals and real earnings management.

Design/methodology/approach

The author develops a new text-based measure of the emphasis managers place on product market competition by conducting a textual analysis of firms’ 10-K filings. Using this measure, the author conducts a battery of econometric analyses and robustness checks to investigate the impact of this measure of product market competition on measures of accruals and real earnings management.

Findings

This study finds robust evidence that when management perceives more competitive threats, they are more likely to engage in accruals-based earnings manipulation but are less likely to engage in real earnings management activity. The author argues that these findings are due to managers’ career concerns enticing them to manage earnings via accrual when competition is high, but that greater product market competition discourages real earning management activity as it can diminish firms’ competitiveness.

Practical implications

The findings of this paper have important policy and practical implications since it signals that managers’ perceptions of product market competition is able to affect accounting choices, information environments and economic outcomes in firms.

Originality/value

This study develops a new text-based measure of managers’ perception of product market competition with the aid of GPT-4. The author then using this measure provides firm-level evidence on how this relates to earnings management.

Citation

Harris, T. (2024), "Managers’ perception of product market competition and earnings management: a textual analysis of firms’ 10-K reports", Journal of Accounting Literature, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAL-11-2022-0116