Impact of real earnings management on earnings persistence – evidence from India

What is it about?

The present study aims to examine the relationship between real earnings management and earnings persistence and also to test how the group affiliation of the firms influences this relationship. The study draws the sample of listed non-financial firm in Indian market from the year 2011to 2018 and applies panel least squares regression with industry and year fixed effects. Future performance of a firm is measured by one year leading value of return on assets. The interaction term of real earnings management and return on assets is used to measure the impact on real earnings management on earnings persistence. The robustness of the results is tested by sub-dividing the sample into group affiliated and non-group affiliated firms. The findings of the study reveal that opportunistic earnings management has significant impact when real earnings management is measured through abnormal increase in operating cash flows and abnormal reduction in discretionary expenditure. On the other hand, signalling earnings management has significant impact when real earnings management is measured through abnormal increase in level of production. The results also reveal that REM has more negative implications on group affiliated firms compared to non-group affiliated firms supporting the theory of entrenchment effect. The study contributes to the existing literature on the implications of real earnings management in emerging markets like India.

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