Empirical Analysis On The Relationship Between Product Market Competition And Earnings Quality

The quality of earnings information is the key factor that protects investors’ interests and that maintains the healthy development of capital markets. Accounting scandals, such as Enron, WorldCom, in the early21st Century draw the public’s attention to the earnings quality. Now, that the earnings information of listed companies in China is of low quality is an indisputable fact. Earnings management of these companies is a common phenomenon and brings adverse effects to the capital markets. Managers’motives for disclosure are influenced by the firm’s economic determinants, institutional settings, as well as industry characteristics. Modern competition theory provides us a new perspective to examine what factors influence the quality of earnings information.The objective of this thesis is to examine the impact of product market competition, as measured by industry concentration and industry homogeneity, on earnings quality. To be specific, it includes:(1) the impact of industry concentration on the quality of earnings information;(2) the impact of industry homogeneity on the quality of earnings information;(3) the impact of the interaction between industry concentration and industry homogeneity on the quality of earnings information. Based on a sample from the Chinese A-share companies listed on Shanghai and Shenzhen Securities Exchange, we have explored the relationship between the product market competition and earnings quality in this thesis.This thesis complements prior research which focuses mainly on the impact of product market competition on accounting information quality. It contributes to the literature in two ways. First, it provides more evidence on the relationship between competition and quality of earnings information. It provides direct evidence that a positive relation exists between competition and the quality of earnings information. Second, prior research has mainly used the level of industry concentration as the sole measure of competition. However, completion encompasses several dimensions. In this thesis, I provide a direct test of the relation between competition and the quality of earnings information based on two dimensions of competition:industry concentration and industry homogeneity.From theoretical discussion and empirical analysis, I find several consistent evidences. First, a negative relation exists between industry concentration and the quality of earnings information. These findings are consistent with the intuition that firms in concentrated industries tend to protect their competitive advantage and avoid public and political attention by choosing a disclosure policy that is of a lower quality. Second, on the relation between industry homogeneity and earnings quality, I find empirical evidence that industry homogeneity has a weakly positive influence on the quality of earnings information. It helps to mitigate agency costs to some extent. Last, there is consistent evidence suggesting that industry homogeneity help to moderate the negative impact of industry concentration on earnings quality. Overall speaking, the above findings confirm that product market competition plays a major role in managers’voluntary disclosure decision and has an impact on the quality of earnings information.