Article2017

Real Versus Accrual-based Earnings Management

Ramesh Chandra Das · Chandra Sekhar Mishra · Prabina Rajib

12 citations0/0 files storedParadigm A Management Research Journal

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Auditing, Earnings Management, Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

This article examines the relationship between accrual-based earnings management (AM) and real earnings management (RM) in the Indian context by considering 673 listed non-financial companies for the period 2009–2013. The article quantifies AM and RM and tests whether Indian companies choose substitute relationship over complementary relationship between AM and RM after factoring firm-specific parameters such as firm size, market-to-book ratio, leverage, accounting flexibility, return on asset (ROA), business group affiliation and absolute accruals. Modified Jones model (1991) and Roychowdhury model (2006) have been used for quantifying AM and RM, respectively. To model the relationship between AM and RM, two-stage least square (2 SLS) regressions method has been used. The results suggest that Indian companies undertake both AM and RM with a higher predisposition towards AM. The positive association between the two supports complementary relationship between two and indicates that Indian companies use AM and RM to garner greater benefit from earnings management.

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References

1978Specification Tests in Econometrics 1991Earnings Management During Import Relief Investigations 2005Performance matched discretionary accrual measures 2005The economic implications of corporate financial reporting 2003Earnings Management through Real Activities Manipulation 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 2002Audit committee, board of director characteristics, and earnings management 1985The effect of bonus schemes on accounting decisions

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