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  • December 2014
  • Article
  • Review of Accounting Studies

Market Competition, Earnings Management, and Persistence in Accounting Profitability Around the World

By: Paul M. Healy, George Serafeim, Suraj Srinivasan and Gwen Yu
  • Format:Print
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Abstract

We examine how cross-country differences in product, capital, and labor market competition, and earnings management affect mean reversion in accounting return on assets. Using a sample of 48,465 unique firms from 49 countries, we find that accounting returns mean revert faster in countries where there is more product and capital market competition, as predicted by economic theory. Country differences in labor market competition and earnings management are also related to mean reversion in accounting returns—but the relation varies with firm performance. Country labor competition increases mean reversion when unexpected returns are positive, but dampens it when unexpected returns are negative. Accounting returns in countries with higher earnings management mean revert more slowly for profitable firms and more rapidly for loss firms. Thus, earnings management incentives to slow or speed up mean reversion in accounting returns are accentuated in countries where there is a high propensity for earnings management. Overall, these findings suggest that country factors explain mean reversion in accounting returns and are therefore relevant for firm valuation.

Keywords

Corporate Performance; Valuation; Equity Valuation; Persistence; Competitive Advantage; Institutions; Earnings Management; Labor Market; Capital Markets; Competition; Profit; Performance; Supply and Industry; Financial Statements; Government and Politics; Globalized Markets and Industries

Citation

Healy, Paul M., George Serafeim, Suraj Srinivasan, and Gwen Yu. "Market Competition, Earnings Management, and Persistence in Accounting Profitability Around the World." Review of Accounting Studies 19, no. 4 (December 2014): 1281–1308.
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About The Authors

Paul M. Healy

Accounting and Management
→More Publications

George Serafeim

Accounting and Management
→More Publications

Suraj Srinivasan

Accounting and Management
→More Publications

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More from the Authors
  • David Crane’s Clean(er) Energy Strategy at NRG By: George Serafeim, Michael W. Toffel and Tom Quinn
  • FIJI Water: Carbon Negative? (Abridged) By: Michael W. Toffel, George Serafeim, Francesca Gino, Stephanie Van Sice and Tom Quinn
  • Sustainability Reporting at Dollar Tree, Inc. By: Suraj Srinivasan and Li-Kuan Ni
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