Real earnings management’s effects on performance in firms reaching the loss avoidance threshold: indian evidence after controlling for variations in firm’s competitive strategy

Karan Gandhi ()
Additional contact information
Karan Gandhi: LM Thapar School of Management, Thapar Institute of Engineering & Technology (TIET)

DECISION: Official Journal of the Indian Institute of Management Calcutta, 2024, vol. 51, issue 3, No 8, 369-395

Abstract: Abstract This study investigates the managerial intent—whether opportunistic or signaling—behind real earnings management (REM) actions taken to meet the loss avoidance threshold by examining their impact on future performance, whether negative or positive. The focus is on the impact of REM through overproduction, as well as selling, general, and administrative expenses (SGAX), both in aggregate and individually, on return on assets (ROA) and cash flow from operations (CFO). Additionally, the study delves into the impact of three components of SGAX, namely marketing expenses (MRKX), welfare and training expenses (WTX), and other general and administrative expenses (OGAX)—separately. To estimate REM proxies, this research utilizes Srivastava’s (2019) models, which account for variation in a firm’s competitive strategy. It applies panel regression analysis on observations from a sample frame consisting of 1444 non-financial enterprises spanning from 2005 to 2019. The findings reveal that firms motivated to meet the loss avoidance threshold and exhibiting REM, particularly through SGAX, experience a negative ROA in later years. The study observes similar implications for MRKX and OGAX. Furthermore, firms engaging in REM through OGAX witnessed unfavorable CFO implications. The study does not observe any impact of REM through overproduction and WTX on future performance. The robustness tests corroborate these findings, and additionally indicate that SGAX and WTX-focused REM negatively impact CFO, while overproduction-focused REM adversely impacts ROA. The results suggest that manager exercise REM opportunistically to avoid losses, highlighting the need for regulatory intervention to address the threshold mentality among Indian firms.

Keywords: Real earnings management; Loss avoidance threshold; Financial performance; Competitive strategy; Institutionalized agency theory (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s40622-024-00393-0 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:decisn:v:51:y:2024:i:3:d:10.1007_s40622-024-00393-0

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/40622

DOI: 10.1007/s40622-024-00393-0

Access Statistics for this article

DECISION: Official Journal of the Indian Institute of Management Calcutta is currently edited by Rajesh Babu

More articles in DECISION: Official Journal of the Indian Institute of Management Calcutta from Springer, Indian Institute of Management Calcutta
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().