Product Market Competition and Earnings Quality: A Non−Linear Relationship

Abstract

The economic literature shows that production market competition could have nonlinear effects on corporate behaviors, such as management effort and innovative activities. We extend the literature by focusing on the influence of product market competition on earnings quality. We propose and document an inverted U-shape relation between earnings quality and product market competition. Earnings quality increases with competition in the lower range of competition and declines with it when competition is intense. The results are robust to assorted measures of earnings quality and competition, and treatment of endogeneity.

Keywords: Earnings Quality; Competition; Non-linearity

JEL Classification: M4