The Relationship between Product Market Power and Earnings Management in Tehran Stock Exchange

Background/Objectives: Product market power is as a natural safety margin that certain companies use for smoothing fluctuations of companies. Financial analysts considered product market power as a crucial factor in assessing prospects of company. There is also empirical evidence that financial analysts' earnings forecasts are correct for companies that have a higher product market power. Increased competition increases risk of bankruptcy, thus creating powerful incentives for managers in order to keep their jobs more strict. As a result, competition can be compressed so that managers manipulate earnings more to overcome threat of bankruptcy. In contrast, companies with greater financial flexibility have stronger position in the product market, indicates that the pressure on managers about earnings manage, will be less applied. The main objective of this study was to test the relationship between product market powers with earning management. Methods/Statistical Analysis: The sample used in this study consisted of 111 firms listed in Tehran Stock Exchange during the years 1383 to 1392 and to test hypothesis, random effects models and generalized least squares estimation method is used. Results: Separate evaluation and analysis impact of product market pricing power on earnings management indicate that showed that although the market price of the product, can affect earnings management, but competition in industry, has good explanatory power. Conclusion/Application: The results indicate negative and significant relationship between research variables.