EconPapers    
Economics at your fingertips  
 

Boundaries of the firm and real earnings management

Vijaya Bhaskar Marisetty and Sairam Moturi

Journal of International Accounting, Auditing and Taxation, 2023, vol. 52, issue C

Abstract: Despite harmful effects, Real Earnings Management (REM) is increasingly becoming a more popular method of earnings management than Accruals based Earnings Management (AEM) (Cohen et al., 2008; Commerford et al., 2018). We argue that when a firm’s organizational structure has extended boundaries with other firms, the benefits due to REM can outweigh the costs. We use family business groups, that extend firm boundaries with other affiliated firms, for testing our conjecture. Using a large dataset of 11,417 firm-year observations of Indian firms, we show that REM is significantly higher in business group affiliated firms compared to standalone firms. Further, intra-group transactions, in the form of purchases, sales, and cash flows from operating activities, contribute to higher REM activities. More importantly, when group affiliated firms engage in intragroup transactions and report higher REM, mainly in the form of abnormal production, they experience an increase in their future profitability and a decrease in their cost of equity.

Keywords: Real earnings management; Firm boundaries; Related party transactions; India (search for similar items in EconPapers)
JEL-codes: M1 M4 M41 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1061951823000460
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jiaata:v:52:y:2023:i:c:s1061951823000460

DOI: 10.1016/j.intaccaudtax.2023.100567

Access Statistics for this article

Journal of International Accounting, Auditing and Taxation is currently edited by R. Larson

More articles in Journal of International Accounting, Auditing and Taxation from Elsevier
Bibliographic data for series maintained by Catherine Liu (repec@elsevier.com).

 
Page updated 2024-12-28
Handle: RePEc:eee:jiaata:v:52:y:2023:i:c:s1061951823000460