Business strategy, market competition and earnings management

Purpose – The purpose of this study is to explore the relationships among business strategy, market competition and earnings management. Design/methodology/approach – This paper uses 2,037 Chinese A-share listed firms from 2010 to 2012 to test the research questions using regression analyses. Findings – The firms that follow cost leadership strategy (cost leaders) are more likely to have a higher level of real earnings management. The firms that follow differentiation strategy (differentiators) are less likely to use real earnings management. For cost leaders, the market competition further increases the level of real earnings management, whereas the level of earnings management of differentiators is not significantly impacted by the market competition. Practical implications – Results of this study indicate the feasibility of differentiation strategy in China and suggest that management should be encouraged to use such a strategy or to use a hybrid strategy to achieve its operational and financial goals. Originality/value – The study contributes to the research of earning management by providing evidence on that business strategy has significant impacts on earnings management. It also shows an incremental influence of market competition on earnings management through its impacts on business strategy.