Product Market Competition and Real Earnings Management to Meet or Beat Earnings Targets

Earnings management could be motivated by either managerial opportunism or efficient contracting. To discriminate between these motivations, I use a measure of product market competition that analytical research predicts will discipline managers and better align their interests with those of shareholders. Thus, if earnings management reflects managerial opportunism, then an increase in competition will decrease earnings management; and if it reflects efficient contracting, then an increase in competition will increase earnings management. Consistent with earnings management indicating managerial opportunism, I show that an increase in competition decreases real earnings management in the form of overproduction to avoid reporting negative earnings or a negative change in earnings.