Cash Flow Manipulation in State-owned Enterprises

Neerav Nagar and Jaskiran Arora

No WP2016-03-25, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: Manuscript Type: Empirical Research Question/Issue: We examine whether the state-owned enterprises (SOEs) are more likely to manipulate operating cash flows than private-owned enterprises (POEs). We also test whether the financially distressed SOEs are more likely to exhibit such manipulation. Research Findings/Insights: Consistent with the arguments about SOEs being inefficient, we find that these are more likely to manipulate operating cash flows than POEs. Our results suggest that SOEs are likely to upward manage reported cash flows by about 6-8% more as compared to POEs. This manipulation in SOEs increases with profitability on one hand and with financial distress on the other i.e. SOEs with higher profitability and higher financial distress demonstrate higher cash manipulations. Theoretical/Academic Implications: There is dearth of literature on cash flow manipulation and none that presents the evidence on such manipulation by SOEs. The literature shows that firms manipulate cash flows from operations (Lee, 2012; Hollie et al., 2011), and SOEs are more likely to manage earnings (Ding et al. 2007; Wang & Yung, 2011; Liu et al., 2014). We link both sets of literature and present first evidence that SOEs are more likely to upward manage cash flows from operations as compared to POEs. Practitioner/Policy Implications: Our findings should be of interest to policy makers and accounting standards-setting bodies in emerging markets, suggesting that there is a need to pay closer attention to cash flow reporting practices of SOEs. This might also help the State to develop a redressal mechanism by bringing about changes in the practices and policies governing SOEs.

Date: 2016-03-18
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Persistent link: https://EconPapers.repec.org/RePEc:iim:iimawp:14447

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