Product market competition and earnings management: the role of managerial ability

What is it about?

This study examines whether and how managerial ability is associated with the relation between product market competition and earnings management. The authors argue that high-ability managers may moderate the underlying relations in both directions, and they are likely to trade-off relative costs between accrual earnings management (AEM) and real earnings management (REM). This study shows empirical evidence that high-ability managers in high competition industries are likely to engage in accrual-based earnings management but less likely to engage in real earnings management. These findings overall indicate that high-ability managers in high competition industries trade-off between different forms of earnings management based on their relative costliness and choose the one that is relatively less costly.

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