From retaliation to resilience: tracing the path of earnings stability in competitive markets

• Date: 28 November 2024
• Pages: 144-168
• DOI: https://doi.org/10.1108/IJAIM-04-2024-0117
• Published date: 28 November 2024
• Author: Jimi Park,Shijin Yoo,Minyoung Noh

From retaliation to resilience: tracing

the path of earnings stability

in competitive markets

Jimi Park

Department of Marketing, Hult International Business School,

Cambridge, Massachusetts, USA

Shijin Yoo

Department of Marketing, Korea University Business School, Seoul,

Republic of Korea, and

Minyoung Noh

Department of Accounting, College of Business and Economics,

California State University Los Angeles, Los Angeles, California, USA

Abstract

Purpose –The purpose of this paperis to develop a more comprehensive understanding of the consequences

of retaliationsand our evidence indicates that retaliations are benef‌icial for f‌irms with supranormalearnings by

making their higher earnings more persistent,but harmful for f‌irms with subnormal earnings by slowing the

recoveryof their earnings.

Design/methodology/approach –This paper use annual Compustat f‌iles based on Fama-French 48 industry.

The time-varying competitive reactions (CRs) for each f‌irm are captured using quarterly rolling-window

estimation across 41 windows with f‌ive years (i.e. 20 observations)in each window. This paper measure earnings

persistence as the slope coeff‌icient (ß1) from regressing future earnings on current earnings. The result remains

qualitatively similar to the main f‌indings when alternative measures of earnings persistence.

Findings –Abnormal earningsare expected to dissipate in the long run owing to competitive forces, but this

paper show that more retaliatory CRs increaseearnings persistence. This is good news for supranormal f‌irms

as they can sustain high prof‌itability. However, it will be harder to revert subnormal earnings to the industry

mean if such f‌irms conductmore retaliatory CRs. This paper also show that these associationsare stronger for

less competitiveindustries.

Research limitations/implications –First, high earnings persistence per se would not be a major consideration

in the f‌irm’sstrategic decisions but a natural by-product of such decisions spanning an extended period of oper ations.

Second, though this paper focus on the period of 2004–2018 that includes the rebound after f‌inancial crisis in 20 08,

an extension of the observation period over a longer economic cycle would verify our results.

Practical implications –CRs are regarded as an evolving portfolio of dynamic marketing decisions and

tools for strategic decisions in our study. It helps how f‌irms manage competition over time to lengthen the

superior performance.Also it helps the low-prof‌itability f‌irms attempting to improve prof‌itabilityby showing

nonretaliationmay be a more appropriate strategy than retaliation.

Social implications –Firms in f‌inancial distress suffer from illiquidity, survival of f‌irms is contingent on

meeting their f‌inancial obligations,thus need for turnaround decisions. However, retaliations underf‌inancial

distress canmitigate the effect of such turnaround decisionsand thereby aggravate the situation.

Originality/value –Greater persistence extends the benef‌its of superior earnings, thus increasing the

opportunities for value exploitation, but it may also restrictearnings recovery. This paper f‌inds that the way

that f‌irms react within the competition explainthe differences in earnings persistence. Although a large body

of research has examined the static drivers(e.g. f‌irm size and diversif‌ication) of the differential persistence of

IJAIM

33,1

144

Received3 April 2024

Revised23 August 2024

Accepted4 Nove mber 2024

InternationalJournal of

Accounting& Information

Management

Vol.33 No. 1, 2025

pp. 144-168

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-04-2024-0117

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

earnings, there has been little research on dynamic drivers that explicitly recognize the erosion process for

earnings.

Keywords Product market competition, Interf‌irm rivalry, Product differentiation,

Competitive reaction, Earnings persistence, Competitive reactivity

Paper type Research paper

1. Introduction

Competition, through a series of actions and reactions among rival f‌irms, is believed to

effectively eliminateboth abnormally high earnings and abnormally low earnings in the long

term. Although abnormal prof‌itsare mainly derived from innovation and imitation (Hunt and

Morgan, 1995;Jacobsen, 1988;Porter, 1985;Varadarajan and Ramanujam, 1990), in some

cases, abnormal prof‌its could be derived from industry structure as well (Brozen, 1971). In

effect, these “supranormal”and “subnormal”outcomes would be dampened by an ongoing

stream of competitive behaviors, with the net result being some degree of reduced earnings

variability and increasedearnings persistence.

Earnings persistence has been of signif‌icant interest in accounting and f‌inance literature.

Sustainable earnings are the major component of equity value (Freeman et al., 1982) and

have a signif‌icant impact on valuation (Ohlson,1995). It is important to note that marketing

literature emphasized that the “types of a competitive reaction”and “timing”of such

responses are the attributes, which diminish sustainability of competitive advantage (Hou

and Yao,2022;Hsieh and Hyun, 2018;Andrevski and Miller, 2022;Qiet al., 2023).. Indeed,

if a f‌irm reports persistent supranormal earnings, this represents a long-term benef‌it for that

f‌irm. However, for a f‌irm with persistent subnormal earnings, it will be diff‌icult for those

subnormal earnings to recover to the industry mean. In other words, greater persistence

extends the benef‌its of superior earnings, thus increasing the opportunities for value

exploitation, but it may also restrictearnings recovery. Economics, accounting and strategic

management literatures have identif‌ied various characteristics that are associated with more

persistent prof‌itability. However, there has been muchless interest in the way that f‌irms react

within the competitionto explain the differences in earnings persistence. This gapis puzzling

since competitive reactions (CRs) represent a f‌irm’s sensory system is aware of competitive

attack, is capable to respond (Qi et al.,2023), portrays a f‌irm’s readiness to preempt rival’s

next moves (Dike and Iddy, 2023) and triggers delayed or swift responses which creates a

disruption in competitivepositions (Hou and Yao, 2022).

In this study, we investigate the linkage between the types of CRs and earnings

persistence. Consider two f‌irms iand jcompeting with each other. The two f‌irms engage in

nonprice competition to avoidprice wars. Firm iuses advertising budget decisions to react to

an attack by f‌irm j. Retaliations occur when f‌irm iincreasesits advertising budget to restore

its market share in response to the increase in advertising by f‌irm j. However, if f‌irm i

decreases its advertising in response to f‌irm j, this iscategorized as accommodation. If f‌irm i

does not react with its advertising budget in response to f‌irm j, this is categorized as

nonreaction [1].

For example, there are three oligopolisticcompanies, Netf‌lix, Disneyþand Warner Bros.

Discovery, in the video streaming industry, which has experienced rapid growth during the

COVID-19 pandemic. They dominatethis market in terms of total subscribers and views per

content. In 2021, Netf‌lix remains the most dominant streaming service, but its share drops

below 50% for the f‌irst time. Disneyþquickly began to eat into its share by pricing the

streamer at the lowest level ($6.99/month). In response, Netf‌lix launched a cheaper ad-

supported plan in 2022, contradicting its long-term holding pricing strategy, which was

International

Journal of

Accounting &

Information

Management

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