Investigating accrual and real earnings management of financially troubled Indian firms

Sweta Tiwari and Chanchal Chatterjee

Afro-Asian Journal of Finance and Accounting, 2023, vol. 13, issue 5, 592-611

Abstract: This paper examines whether financially troubled Indian firms manage earnings (both accrual and real activity-based) in the light of newly adopted financial reporting practices (IND-AS) by considering 208 financially distressed non-financial firms from 2017 to 2021. The study uses multiple regression for analysis. The study reveals a significant linkage between financial distress and earnings management and this association varies across accounting and market-based measures of financial distress. Also, the intensity of financial distress influences the direction (upward or downward) of earnings management. Interestingly, we find a stronger association of financial distress with accrual-based earnings management than real activity-based earnings management. Results also exhibit that the earnings management of financially troubled Indian firms is higher during the COVID-19 pandemic period. The findings can help regulators and policymakers to design suitable policies to improve the quality of earnings reporting and constrain the possibility of earnings management.

Keywords: earnings management; financial distress; emerging economies; Z-score; India; discretionary accruals; accrual earnings management; real earnings management. (search for similar items in EconPapers)
Date: 2023
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