Comparative evaluation of earnings management strategies a study of select Indian companies

Abstract

The rising incidence of accounting failures and scandals, leading to bankruptcy filings by the multinational enterprises and substantially resulting in huge loss of investors wealth, has brought the companies quality of financial reporting to question. The past studies have contended Earnings Management to be the primary driver for materialisation of these accounting failures. This study attempts to investigate the earnings management practices of the Indian companies by employing multiple models of Accrual Earnings Management as well as Real Earnings Management and identifying the nature of association therein (substitutive or complementary), using simultaneous equations models on a sample of all the BSE-listed companies for 10 financial yearsi.e.,31stMarch,2010 - 31st March, 2019. This study, through panel data regression, also attempts to examine managers decision to trade-off one earnings management strategy for the other on the basis of their costs and constraints and the lifecycle stage the firms are at. The investigationoftheresearchproblemisalsocarriedforarefinedsampleoffirm-yearsthat meet or just beat earnings benchmarks (zero earnings and previous year s earnings). The findings provide evidence of complementary relationship between the strategies. Further, evidence isalso found for trade-off between the strategies on the basis of certain costs and lifecycle stages. Thus, this study contributes to the EM literature by undertaking a comprehensive approach to the analysis by studying both Accrual Earnings Management as well as Real Earnings Management in the Indian context, which are estimated through various models. newline