Firm Life Cycle and Real-Activity Based Earnings Management

Neerav Nagar and Suresh Radhakrishnan

No WP2015-12-01, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: We examine real-activity based earnings management, i.e., cuts in discretionary innovation/marketing spending and overproduction for meeting the earnings benchmark of avoiding losses across firms’ life cycle. We use the cash flow components to classify a firm’s life cycle. We hypothesize and find that firms in the growth and mature stages exhibit real-activity based earnings management to meet earnings target of avoiding losses; but firms in the introductory stage do not. We also hypothesize and find that such real-activity based earnings management to meet the earnings benchmark of avoiding losses is associated with future performance for mature firms, but not so for growth firms. Collectively, our evidence shows the importance of considering firm’s life cycle when examining real-activity based earnings management.

Date: 2015-12-15
New Economics Papers: this item is included in nep-bec, nep-cse and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:iim:iimawp:13767

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