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

Sudarshan Jayaraman
University of North Carolina at Chapel Hill

Kartik Raman
Bentley College

Abstract: We test the hypothesis that product market competition affects firms’ incentives to reveal information by examining the relation between competition and measures of accounting quality. We find that firms in competitive industries report larger discretionary accruals and more volatile earnings than firms in less competitive industries. The results are consistent with theories predicting that firms add uncertainty to financial statement information when the costs of revealing proprietary information are high. Further, the inverse relation between competition and accounting quality is pronounced (attenuated) when adverse selection costs are low (high). The relation between competition and accounting quality is robust across countries.

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