Abstract
Purpose This study aims to understand the impact of market power and competition on earnings management, particularly discretionary accruals, in the Chinese and Taiwanese tourism industries. China and Taiwan differ not only in their political and social systems but also in their economic systems. The research aims to provide managers and investors with stock selection strategy in the decision-making process. Design/methodology/approach Accounting data consisted of 60 publicly traded travel companies in China and Taiwan from 2000 to 2014. Methodology included correlation matrix for the variables, univariate and multivariate regression and competition analysis. Findings Based on empirical results, the authors found a significant negative correlation between market power and discretionary accruals and market concentration (or lower market competition) and discretionary accruals in both the Chinese or Taiwanese markets. Although the Chinese travel companies enjoyed higher market power and market concentration, they engaged in less earnings manipulation than their Taiwanese counterparts as a result of the Chinese Government regulation. Research limitations/implications Based on listed travel companies, generalization of the research results to entire tourism industry is limited. This study compares the travel companies’ practices of smoothing out earnings between China and Taiwan, thus helping managers and investors in making their financing, investment decisions. Originality/value This research contributes to the earnings management literature by examining a specific industry of tourism. This paper is original in two ways. The authors linked market power and market competition with earnings management simultaneously and then compared the Chinese and Taiwanese tourism industries in manipulating earnings.
Highlights
Financial reports are used to convey corporate information on firm performance
Notes: Hirschman Index (HHI) means a measure of market concentration; Panel A shows if the difference of HHI between China and Taiwan is different from zero; Panel B shows if the difference of HHI between China and Taiwan is different from zero; ***, ** and *denote 1%, 5%, 10% significance level, respectively; we examined the impact of market competition on earnings management discretionary accruals using HHI as a measure of market concentration
The results suggested that high growth of firms increased discretionary accruals while higher book-to-market ratio, higher long-term debt, or greater firm size decreased discretionary accruals in the Taiwan market
Summary
Corporate managers could choose reporting methods to reflect the financial figures to their own advantages. One of these accounting practices is called earnings management, known as earning manipulation. Earnings management refers to a strategy used by a firm’s management to apply accounting rules flexibly to manipulate corporate profits (Bodie et al, 2013). This technique is conducted for income smoothing, which means that by eliminating large movements in profits, companies can report a smooth trend over a number of years (Hussey, 1995). Sambharya (2011) claimed that earnings management assisted firms in meeting stock analysts’ earnings forecasts to enhance the firm’s perceived performance
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