The Effect of Competition on Real Earnings Management – A Re-examination

Abstract

This study examines the effect of competition in the product and labour markets on real earnings management (REM). REM is accomplished by firms changing investing or operating decisions primarily to increase current period earnings and can affect future cash flows negatively. Using data from Standard and Poor’s 1500 index firms from 1992 to 2015, I find strong support for the prediction that managers in more competitive labour markets are more inclined to use REM activities. However, I find little evidence that firms in more competitive product markets will reduce their engagement in REM activities. The results from the interaction of these two markets show that managers are more inclined to use REM activities whenever they face high labour market competition. This suggests that managers’ primary concern as they make REM decisions is the impact on their career.