Browse > Article
http://dx.doi.org/10.13106/jafeb.2021.vol8.no12.0323

Real Earnings Management and Persistence of Firm Value: Evidence from India  

POTHARLA, Srikanth (Department of Finance and Accounting, ICFAI Business School (IBS), (A constituent of IFHE, Deemed to be University))
BHATTACHARJEE, Kaushik (Department of Finance and Accounting, ICFAI Business School (IBS), (A constituent of IFHE, Deemed to be University))
SAMONTARAY, Durga Prasad (College of Business Administration, King Saud University)
Publication Information
The Journal of Asian Finance, Economics and Business / v.8, no.12, 2021 , pp. 323-336 More about this Journal
Abstract
The present study aims to examine the impact of real earnings management on the future value of the firm and its persistence. The study also tests suspect firm effects on the relationship between real earnings management and the future value of the firm. The sample of the present study consists of all listed non-financial firms from the year 2011 to 2018. Real earnings management has been measured in three alternative ways viz., abnormal operating cash flows, abnormal discretionary spending, and abnormal production cost. Tobin's Q is used as a measure of firm value. The interaction term of real earnings management and Tobin's Q is used to test firm value persistence. The results of the analysis disclose that out of three measures of real earnings management, abnormal reduction in discretionary spending only has a significant negative impact on the persistence of firm value. Moreover, the suspect firm analysis reveals that when the underlying motive of real earnings management is to meet zero earnings, both abnormal increases in operating cash flows and abnormal reduction in discretionary spending have a significant negative impact on firm value persistence.
Keywords
Real Earnings Management; Suspect Firm Effect; Firm Value; Opportunistic Earnings Management; Signalling Earnings Management;
Citations & Related Records
연도 인용수 순위
  • Reference
1 Ajay, R., & Madhumathi, R. (2015). Institutional ownership and earnings management in India. Indian Journal of Corporate Governance, 8(2), 119-136. https://doi.org/10.1177/0974686215602368   DOI
2 Al-Shattarat, B., Hussainey, K., & Al-Shattarat, W. (2018). The impact of abnormal real earnings management to meet earnings benchmarks on future operating performance. International Review of Financial Analysis, 10, 1-15. https://doi.org/10.1016/j.irfa.2018.10.001   DOI
3 DeFond, M. L. (2002). Discussion of the balance sheet as an earnings management constraint. Accounting Review, 77(1), 29-33. https://doi.org/10.2308/accr.2002.77.s-1.29   DOI
4 Ewert, R., & Wagenhofer, A. (2005). Economic effects of tightening accounting standards to restrict earnings management. The Accounting Review, 80(4), 1101-1124. https://www.jstor.org/stable/4093118   DOI
5 Taylor, G. K., & Xu, R. Z. (2010). Consequences of real earnings management on subsequent operating performance. Research in Accounting Regulation, 22(2), 128-132. https://doi.org/10.1016/J.RACREG.2010.07.008   DOI
6 Tran, Q. T., Lam, T. T., & Luu, C. D. (2020). Corporate governance and earnings management: A study of Vietnamese listed banks. Journal of Asian Finance, Economics, and Business, 7(12), 389-395. https://doi.org/10.13106/jafeb.2020.vol7.no12.389   DOI
7 Zhao, Y., Chen, K. H., Zhang, Y., & Davis, M. (2012). Takeover protection and managerial myopia: Evidence from real earnings management. Journal of Accounting and Public Policy, 31(1), 109-135. https://doi.org/10.1016/J.JACCPUBPOL.2011.08.004   DOI
8 Gunny, K. A. (2010). The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 46, 56. https://doi.org/10.1111/j.1911-3846.2010.01029.x   DOI
9 McConnell, J. J., & Servaes, H. (1990). Additional evidence on equity ownership and corporate value. Journal of Financial Economics, 12(4), 33-49. https://doi.org/10.1016/0304-405X(90)90069-C   DOI
10 Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335-370. https://doi.org/10.1016/j.jacceco.2006.01.002   DOI
11 Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), 15-29. https://doi.org/10.2307/1991374   DOI
12 Mizik, N., & Jacobson, R. (2007). Myopic marketing management: Evidence of the phenomenon and its long-term performance consequences in the SEO context. Marketing Science, 26(3), 361-379. https://doi.org/10.1287/mksc.1060.0261   DOI
13 Morck, R., Shleifer, A., & Vishny, R. W. (1988). Management ownership and market valuation. An empirical analysis. Journal of Financial Economics, 20(C), 293-315. https://doi.org/10.1016/0304-405X(88)90048-7   DOI
14 Mulchandani, K. K., Mulchandani, K. K., & Wasan, P. (2019). Dividends and earnings quality: evidence from India. IIMB Management Review, 11, 91-118. https://doi.org/10.1016/j.iimb.2019.10.001   DOI
15 Bhojraj, S., & Libby, R. (2005). Capital market pressure, disclosure frequency-induced earnings/cash flow conflict, and managerial myopia (retracted). The Accounting Review, 80(1), 1-20. https://doi.org/10.2308/accr.2005.80.1.1   DOI
16 Eldenburg, L. G., Gunny, K. A., Hee, K. W., & Soderstrom, N. (2011). Earnings management using real activities: Evidence from nonprofit hospitals. The Accounting Review, 86(5), 1605-1630. https://doi.org/10.2308/accr-10095   DOI
17 Pathak, R., & Ranajee, S. (2018). Earnings quality and corporate payout policy linkages: An Indian context. The North American Journal of Economics and Finance, 51(7), 100855. https://doi.org/10.1016/j.najef.2018.10.003   DOI
18 Hirshleifer, D., Hou, K., Teoh, S. H., & Zhang, Y. (2004). Do investors overvalue firms with bloated balance sheets? Journal of Accounting and Economics, 38, 297-331. https://doi.org/10.1016/j.jacceco.2004.10.002   DOI
19 Subramanyam, K. R. (1996). The pricing of discretionary accruals. Journal of Accounting and Economics, 22(1-3), 249-281. https://doi.org/10.1016/S0165-4101(96)00434-X   DOI
20 Tan, H. C., & Jamal, K. (2006). Effect of accounting discretion on the ability of managers to smooth earnings. Journal of Accounting and Public Policy, 25(5), 554-573. https://ideas.repec.org/a/eee/jappol/v25y2006i5p554-573.html   DOI
21 Sarkar, J., Sarkar, S., & Sen, K. (2013). Insider control, group affiliation and earnings management in emerging economies: Evidence from India. SSRN Electronic Journal, 11, 331-341. https://doi.org/10.2139/ssrn.2197713   DOI
22 Potharla, S., Bhattacharjee, K., & Iyer, V. (2021). Institutional ownership and earnings management: Evidence from India. Cogent Economics & Finance, 9(1), 1902032. https://doi.org/10.1080/23322039.2021.1902032   DOI
23 Rudra, T., & Bhattacharjee, C. A. D. (2012). Does IFRS influence earnings management? Evidence from India. Journal of Management Research, 4(1), 1. https://doi.org/10.5296/jmr.v4i1.849   DOI
24 Sarkar, J., & Sarkar, S. (2000). Large shareholder activism in corporate governance in developing countries: Evidence from India. International Review of Finance, 1(3), 161-194. https://doi.org/10.1111/1468-2443.00010   DOI
25 Zang, A. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675-703. https://doi.org/10.2308/accr-10196   DOI
26 Khanna, T., & Palepu, K. (2000). Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. The Journal of Finance, 55(2), 867-891. https://doi.org/10.1111/0022-1082.00229   DOI
27 Li, M., Lu, Y., & Phillips, G. M. (2019). CEOs and the product market: When are powerful CEOs beneficial? Journal of Financial and Quantitative Analysis. https://doi.org/10.1017/S0022109018001138   DOI
28 Brown, L. D., & Higgins, H. N. (2005). Managers' forecast guidance of analysts: International evidence. Journal of Accounting and Public Policy, 24(4), 280-299. https://doi.org/10.1016/j.jaccpubpol.2005.05.001   DOI
29 Dechow, P. M., Richardson, S. A., & Tuna, I. (2003). Why are earnings kinky? An examination of the earnings management explanation. Review of Accounting Studies, 8(2-3), 355-384. https://doi.org/10.1023/A:1024481916719   DOI
30 Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228. https://doi.org/10.2307/2491047   DOI
31 Kim, Y., Park, M. S., & Wier, B. (2012). Is earnings quality associated with corporate social responsibility? The Accounting Review, 87(3), 761-796. https://doi.org/10.3390/su11154116   DOI
32 Bhojraj, S., Hribar, P., Picconi, M., & McInnis, J. (2009). Making sense of scents: An examination of firms that marginally miss or beat analyst forecasts. The Journal of Finance, 64(5), 2361-2388. https://doi.org/10.1111/j.1540-6261.2009.01503.x   DOI
33 Badertscher, B. A. (2011). Overvaluation and the choice of alternative earnings management mechanisms. Accounting Review, 86(5), 1491-1518. https://doi.org/10.2308/accr-10092   DOI
34 Bartov, E., Givoly, D., & Hayn, C. (2002). The rewards to meeting or beating earnings expectations. Journal of Accounting and Economics, 33(2), 173-204. https://doi.org/10.1016/S0165-4101(02)00045-9   DOI
35 Beaver, W. H., McNichols, M. F., & Nelson, K. K. (2003). Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry. Journal of Accounting and Economics, 35(3), 347-376. https://doi.org/10.1016/S0165-4101(03)00037-5   DOI
36 Brown, K., Chen, V. Y. S., & Kim, M. (2015). Earnings management through real activities choices of firms near the investment-speculative-grade borderline. Journal of Accounting and Public Policy, 34(1), 74-94. https://doi.org/10.1016/j.jaccpubpol.2014.09.002   DOI
37 Chatterjee, R., & Rakshit, D. (2020). Association between earnings management and corporate governance mechanisms: A study based on select firms in India. Global Business Review, 53, 616-623. https://doi.org/10.1177/0972150919885545   DOI
38 Houqe, M. N., Ahmed, K., & van Zijl, T. (2018). Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from India. SSRN Electronic Journal, 1(1), 111-121. https://doi.org/10.2139/ssrn.1967293   DOI
39 Han, S., Kang, T., Salter, S., & Yoo, Y. K. (2010). A cross-country study on the effects of national culture on earnings management. Journal of International Business Studies, 41(1), 123-141. https://www.jstor.org/stable/27752481   DOI
40 Hernawati, R. I., Ghozali, I., Yuyetta, E. N. A., & Prastiwi, A. (2021). The Effect of Income and Earnings Management on Firm Value: Empirical Evidence from Indonesia. Journal of Asian Finance, Economics, and Business, 8(4), 105-112. https://doi.org/10.13106/jafeb.2021.vol8.no4.0105   DOI
41 Hussein, S. K., & Venkatram, R. (2013). Corporate governance and firm's value: An empirical analysis of agri-input firms in India. International Journal of Commerce, Business and Management, 2(6), 353-362. https://doi.org/10.1177/0974686216635787   DOI
42 Jackling, B., & Johl, S. (2009). Board structure and firm performance: Evidence from India's top companies. Corporate Governance: An International Review, 17(4), 492-509. https://doi.org/10.1111/j.1467-8683.2009.00760.x   DOI
43 Li, V. (2019). The effect of real earnings management on the persistence and informativeness of earnings. The British Accounting Review, 51(4), 402-423. https://doi.org/10.1016/j.bar.2019.02.005   DOI
44 Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93(6), 1155-1177. https://doi.org/10.1086/261354   DOI
45 Francis, B., Hasan, I., & Li, L. (2016). Abnormal real operations, real earnings management, and subsequent crashes in stock prices. Review of Quantitative Finance and Accounting, 46(2), 217-260. https://doi.org/10.1007%2Fs11156-014-0468-y   DOI
46 Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73. https://doi.org/10.1016/j.jacceco.2005.01.002   DOI
47 Koh, K., Matsumoto, D. A., & Rajgopal, S. (2008). Meeting or beating analyst expectations in the post-scandals world: Changes in stock market rewards and managerial actions. Contemporary Accounting Research, 25(4), 1067-1098. https://doi.org/10.1506/car.25.4.5   DOI
48 Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: an international comparison. Journal of Financial Economics, 69(3), 505-527. https://doi.org/10.1016/S0304-405X(03)00121-1   DOI
49 Lyimo, G. D. (2014). Conditional Conservatism and its effect on earnings quality and stock prices in the Indian capital market. European Journal of Business and Management, 6(22), 20-41. https://iiste.org/Journals/index.php/EJBM/article/view/14459/0.
50 McGuire, S. T., Omer, T. C., & Sharp, N. Y. (2012). The impact of religion on financial reporting irregularities. The Accounting Review, 87(2), 645-673. https://www.jstor.org/stable/23245618   DOI
51 Mizik, N. (2010). The theory and practice of myopic management. Journal of Marketing Research, 47(4), 594-611. https://doi.org/10.1509/jmkr.47.4.594   DOI
52 Das, R. C., Mishra, C. S., & Rajib, P. (2017). Real Versus Accrual-based Earnings Management: Do Indian Firms Prefer One over the Other? Paradigm. https://doi.org/10.1177/0971890717736214
53 Cheng, Q., Lee, J., & Shevlin, T. (2016). Internal governance and real earnings management. The Accounting Review, 91(4), 1051-1085. https://doi.org/10.2308/accr-51275   DOI
54 Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual-based earnings management in the pre-and post-Sarbanes-Oxley periods. The Accounting Review, 83(3), 757-787. https://www.jstor.org/stable/30244500   DOI
55 Dang, H. N., Nguyen, T. T. C., & Tran, D. M. (2020). The impact of earnings quality on firm value: The case of Vietnam. Journal of Asian Finance, Economics, and Business, 7(3), 63-72. https://doi.org/10.13106/jafeb.2020.vol7.no3.63   DOI
56 Dawar, V. (2014). Earnings persistence and stock prices: Empirical evidence from an emerging market. Journal of Financial Reporting and Accounting, 12(2), 117-134. https://doi.org/10.1108/jfra-06-2013-0044   DOI
57 Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 56(3), 193-225. https://doi.org/10.1002/9781119204763.ch4   DOI