This study examines how negative performance feedback is associated with real earnings management (REM) and how firm-level market power conditions that relationship. Building on the behavioural theory of the firm and threat-rigidity theory, we argue that performance shortfalls direct organizational attention towards responses that are immediate, proximate, and risk-acceptable. REM fits this behavioural profile because it can alter reported outcomes through real operating decisions while remaining less directly visible than many accounting choices or illegal actions. Using 23,629 firm-year observations for publicly listed U.S. firms from 1992 to 2018, we find that larger performance shortfalls are associated with higher REM. We also find that this relationship weakens as market power increases. Additional analyses support a cautious interpretation: the evidence is more consistent with shortfall-driven opportunistic REM than with a purely strategic or efficiency-enhancing explanation, although standard REM proxies do not directly identify managerial intent. The findings contribute to applied research on firm behaviour under performance pressure by showing that market power can alter the way firms respond to adverse feedback through real operating decisions.
Lee et al. (Wed,) studied this question.