Competition, Risk and Managerial Incentives

Raith, Michael

doi:10.2139/ssrn.262648

Cited by 258 publications

(429 citation statements)

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“…221-223), doubts exist that it could imply both high and low competition. Recent research suggests that when market structure is assumed to be endogenous, it is unclear whether low values of concentration capture low or high competition, especially in cross-industry analyses (e.g., Demsetz, 1973;Symeonidis, 2002;Raith, 2003;Aghion et al, 2005). Therefore, a tension exists on the topic of whether industry concentration (competition) is associated with low or high degree of industry competition and how this competition acts as an external governance mechanism in influencing corporate earnings management.…”

Section: Industry Concentrationmentioning

confidence: 99%

“…Another motivation for earnings manipulation is to strategically limit and obfuscate the information available to rivals in an attempt to maintain a competitive advantage. Thus firms facing greater competitive pressures may be motivated to manage earnings to limit information available to 1 There is also a substantial body of theoretical research examining the link between product market power and its disciplinary effect on managerial behavior (see, for example, Holmstrom, 1982;Hermalin, 1992;Aghion, Dewatripont and Rey, 1999;and Raith, 2003). their rivals.…”

Section: Introductionmentioning

confidence: 99%

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Product market power, industry structure, and corporate earnings management

Datta

Iskandar‐Datta

Singh

2013

Journal of Banking & Finance

217

142

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This is the first study to establish a link between product market power of firms and the degree of earnings management. We hypothesize and document a significant and robust association between (a) a firm's product market pricing power and its degree of earnings management, and (b) industry competitiveness and the degree of earnings management in the industry. Our study reveals that firms with inferior product market pricing power engage in greater discretionary earnings accruals, adding a new dimension to our understanding of the transparency and quality of firms' financial statements. These findings are mirrored at the industry level where we document that more competitive industries are associated with greater earnings manipulation. The empirical evidence has direct implication on the informativeness and earnings quality of firms based on their product market power and competitiveness. JEL classification: G30; L11; M4; M41Keywords: Product market power; industry structure and competition; earnings management; discretionary accruals management.

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Section: Industry Concentrationmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Product market power, industry structure, and corporate earnings management

Datta

Iskandar‐Datta

Singh

2013

Journal of Banking & Finance

217

142

View full text Add to dashboard Cite

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“…2 Perhaps the earliest relates the degree of competition to managerial incentives, either in a competitive setting (Machlup 1967;Hart 1983;Sharfstein 1988) or in an imperfectly competitive framework (Fershtman and Judd 1987;Schmidt 1997;Raith 2003). The focus there is on the power of compensation schemes, leaving 1.…”

Section: Related Literaturementioning

confidence: 99%

A Price Theory of Vertical and Lateral Integration*

Legros

Newman²

2013

The Quarterly Journal of Economics

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This article presents a perfectly-competitive model of firm boundary decisions and study their interplay with product demand, technology, and welfare. Integration is privately costly but is effective at coordinating production decisions; nonintegration is less costly, but coordinates relatively poorly. Output price influences the choice of ownership structure: integration increases with the price level. At the same time, ownership affects output, since integration is more productive than nonintegration.For a generic set of demand functions, equilibrium delivers heterogeneity of ownership and performance among ex-ante identical enterprises. The price mechanism transmutes demand shifts into industry-wide re-organizations and generates external effects from technological shocks: productivity changes in some firms may induce ownership changes in others. If the enterprise managers have full title to its revenues, market equilibrium ownership structures are second-best efficient. When managers have less than full revenue claims, equilibrium can be inefficient, with too little integration.

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“…Frank and Cook (1995) discuss how these arguments hold quite generally in many types of markets. My model of the market structure is similar to that of Raith (2003), who studies how the market structure determines explicit incentive contracts. In such a model, the market structure also determines the value of a reputation and, thus, the value of learning about talent.…”

Section: Related Literaturementioning

confidence: 99%

“…This i ϩ 2 possibility is typically ignored by simply letting a firm compete with its two closest neighbors only (Tirole 1988, 283). Raith (2003Raith ( , 1427 justifies this approximation by stating that "Large random cost differences can be ignored if the variance of the cost shocks is sufficiently small." …”

Section: Appendixmentioning

confidence: 99%

Organizational Form and the Market for Talent

Harstad¹

2007

Journal of Labor Economics

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This article brings together the market for products, the market for talent, and firms' organizational form. While the organizational design determines the allocation of blame and fame within the firm, the value of a good reputation depends on the market structure. Consequently, the market structure dictates the optimal organizational design. If competition becomes tougher and the market thicker, transparent firms decentralize while nontransparent firms concentrate control, transparency itself is improved, corporations switch from unitary to multidivisional form, and the turnover of managers increases. The model rationalizes recent trends in both executive pay and organizational design.

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Competition, Risk and Managerial Incentives

Cited by 258 publications

References 0 publications

Product market power, industry structure, and corporate earnings management

Product market power, industry structure, and corporate earnings management

A Price Theory of Vertical and Lateral Integration*

Organizational Form and the Market for Talent

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