Gross Profit Manipulation: Impact of Product Market Competition

Abstract

This study presents first evidence on the misclassification of income statement items by mangers in order to inflate gross profits. Specifically, managers classify costs of goods sold as other operating expenses thereby manipulating gross profit. Firms in more competitive industries are more likely to engage in such misclassification. The study thus sheds light on an earnings management tool which has not been discussed in the literature and shows the adverse effects of product market competition.