How does competition shape managerial decisions? Product market competition and financial statement comparability
ISSN: 0025-1747
Article publication date: 1 July 2018
Issue publication date: 23 October 2018
Abstract
Purpose
The purpose of this paper is to explore the effects of competitive pressure on financial statements’ comparability (comparability) by analyzing various dimensions of competition.
Design/methodology/approach
The authors study the effect of competition on comparability using the comparability measure of De Franco et al. (2011) and various proxies for competition, competition from existing/potential rivals and non-price competition (NPC).
Findings
This study documents that competition is positively associated with comparability, and this effect is more (less) pronounced for industry followers (leaders). The authors also document that competition from existing rivals enhances comparability, but competition from potential entrants does not. Moreover, NPC is also a significant determinant of comparability. Furthermore, the competition from existing/potential rivals plays no significant role in the production of comparable financial statements in state-owned enterprises. The results are robust to alternative measures of comparability and methodological approaches.
Originality/value
This study is the first empirical study that documents a new channel (comparability) through which competition affects financial statements. The findings support the argument that competitive pressure acts as a governance mechanism, disciplines management and increases comparability leading to lower information asymmetry (governance view). However, the findings contest the argument that higher competition motivates managers to withhold information (proprietary cost hypothesis). By examining the effect of state ownership, this study might also help to characterize the effects of changes in corporate objectives on managerial decisions related to financial reporting.
Keywords
Acknowledgements
This research was supported by the National Natural Science Foundation of China (Grant No. 71373236). The authors are thankful to Professor Richard A. Hunt (associate editor) and anonymous reviewers for their guidance and constructive suggestions. The authors appreciate the workshop participants at the School of Accounting and seminar participants at the International Business School, Zhejiang Gongshang University for their comments, and also thank Dr Najid Ahmed for his suggestions.
Citation
Majeed, M.A., Yan, C. and Tauni, M.Z. (2018), "How does competition shape managerial decisions? Product market competition and financial statement comparability", Management Decision, Vol. 56 No. 11, pp. 2437-2471. https://doi.org/10.1108/MD-04-2017-0319
Publisher
:Emerald Publishing Limited
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