Competitive structure and conditional accounting conservatism

This paper empirically investigates the relationship between the competitive structure of product markets and conditional accounting conservatism. Reported findings are consistent with product market competition intensity being an additional explanation for conditional accounting conservatism in financial reporting. Models from the voluntary disclosure literature suggest firms will employ conditional accounting conservatism in an attempt to dissuade potential entrants or to selectively communicate strategic information to existing rivals. I use product market competition constructs similar to those developed by Karuna (Karuna, C. 2007. Industry product market competition and managerial incentives. Journal of Accounting and Economics 43: 275-297) in a Basu-type piecewise-linear regression of accounting income on stock returns (Baru, S. 1997. The conservatism principle and the asymmetric timelines of earnings. Journal of Accounting and Economics 24: 3-37) and document a positive association between product market competition intensity and conditional accounting conservatism using industry-year data. This finding persists after controlling for other known causes of conditional conservatism. Results in this study are consistent with firms employing conditional conservatism in response to product market competition intensity. I also document that firms employ less conditional accounting conservatism before receiving capital infusions from debt or equity markets.