The Effects of Real Earnings Management on the Firm, its Competitors and Subsequent Reporting Periods

Combining new supermarket scanner data with firm-level financial data, the paper considers ‘real’ earnings management behavior evidenced by price reductions relating to different benchmarks hypothesized in prior literature as being important to managers. It further examines the effects of such price reductions on competitor behavior as well as their persistence across multiple reporting periods. The evidence shows that firms reduce prices when key competitors are expected to have earnings management related incentives to discount prices and that the effects of price reductions associated with a single earnings management target are persistent over multiple reporting periods. These findings suggest the effects of Real Earnings Management on subsequent reporting periods and competitor behavior are greater than previously thought.