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In this paper, the authors investigate how management's perception of their competitive environment is related to the firm's future profitability and future stock returns. Financial statement analysis textbooks commonly recommend starting the evaluation process by considering the firm's competitive environment and its strategy for operating in its environment (Healy and Palepu 2007, Lundholm and Sloan 2007, Penman 2003). Further, the SEC recommends that the Management Discussion and Analysis (MD&A) section of the firm's 10-K filing include a discussion of any changes in the firm's competitive position if these changes are the cause of the reported results (Exchange Act Release No 34-48960).
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