Core Competencies and Earnings Management: Evidence From China

We examine the influence of firms' core competencies on earnings management by measuring core competencies through textual analysis. The empirical results, based on the data of Chinese A‐share listed firms over 2012–2020, indicate that more competitive firms have lower discretionary accruals. We find two potential channels: firm performance and financing needs. The negative correlation between core competencies and earnings management is strengthened within firms with a prospector strategy, with fewer external financing opportunities, and with less severe tunnelling. This study enriches the literature on the economic consequences of firms' core competencies and the relationship between strategic management and accounting.