Product Market Competition And Earnings Management

Earnings management has been universal problems in Chinese listed companies, regulators are trying to use the advanced theory and experience at home and abroad to improve the quality of the listed company earnings report, but with little effect. However, financial scandals caused by earnings report still occurred continuously. On the basis of predecessors’ study, this paper will focuses on the effect of product market competition to earnings management. At the same time, it considers the change of mechanism between product market competition and earnings management under the consideration of the board restructuring.Modern competition theory suggests that product market competition, as one of the basic external corporate governance mechanism, has a direct impact on the earnings management of listed companies. And dynamic governance will also have indirect impact on earnings management by changing the mechanism of product market competition to earnings management.This paper analyses the relationship among product market competition, board structure and earnings management by using generalized least square with data from 2007 to 2013, based on modern competition theory and the theory of corporate governance. The results show that compared with the governance effect of product market competition, risk of information disclosure has the dominate influence on earnings management, which makes the company’s earnings management rising with increase of product market competition degree; the board size, independent directors proportion, and job separation are significantly negative correlating with earnings management, that is to say, the board governance put a brake on earnings management behavior; the dynamic changes of board structure highlight governance effect of product market competition to earnings management behavior, the dynamic management of board has significant regulating effect on the relationship between product market competition and earnings management in a certain degree, which weakens the market information disclosure risk and makes earnings management show the tendency of decrease accordingly. Practice shows that order market competition, effective board governance mechanism and perfecting board structure are of great importance to the quality of the company’s earnings report.