Anecdotal evidence in accounting literature has shown the economic consequence of real earnings management. Meeting or beating a short-term earnings threshold can be characterized by a firm to signal private information on its strategic response to economic shock or serve as opportunistic earnings management. This may induce strategic response for competitors within an industry and have impact on a firm’s long-term competitiveness. This study investigates the impact of earnings thresholds on product market competition with one-sided incomplete information in a two-period Cournot competition setting. In this setting, a firm’s first-period output choices are not only strategically made but are also used to convey proprietary information to its rival, and earnings thresholds could coordinate a firm’s intertemporal operating decisions. Our study provides a rationale for arranging intertemporal output levels to achieve a higher second-period earnings threshold (and thus a lower first-period earnings threshold). We identify plausible conditions under which an informed firm can take advantage of its rival’s uncertainty to lower its first-period output and then raise its second-period output, and those choices will create some reserves which are used to reach the higher second-period earnings threshold. This could actually enhance profits. Our results could provide empirical predictions for meeting a short-term earnings threshold in terms of downward real earnings management strategy (i.e., lower short-term output) and its long-term economic consequences in product market competition.

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