An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Christo Karuna
University of California Irvine

Abstract: While some prior studies show that industry product market competition can act as a substitute to managerial incentives, others show that it can act as a complement. The underlying assumption behind these studies is that market structure is exogenous and that competition is uni–dimensional (proxied by industry concentration). However, recent developments in the literature show that with endogenous market structure, competition can be regarded as multi-dimensional (e.g., product substitutability, market size, and entry costs), and consequently it is not clear how concentration reflects competition. Using these determinants of competition, this study contributes to the literature by showing that (a) firms in more competitive industries provide stronger incentives than those in less competitive industries, and (b) competition is multi-dimensional in its relation with incentives.

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