Earnings Management to Meet Earnings Benchmarks: The Impact on Future Performance

Kunnathodi Sudheesh () and Kallumukku Balan Nidheesh ()
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Kunnathodi Sudheesh: Pondicherry University, Pondicherry, India
Kallumukku Balan Nidheesh: Pondicherry University, Pondicherry, India

Economic Research Guardian, 2021, vol. 11, issue 1, 78-102

Abstract: The present study investigates whether firms manipulate earnings to attain specific benchmarks (viz. zero and previous year’s earnings) engage in opportunistic or signalling earnings management. Specifically, the study examines the relationship of discretionary accruals with the one year-ahead company performance. The study spans from 2012 to 2018 for 304 firms listed in India. The panel corrected standard error (PCSE) regression estimator is used for the analysis. Our analysis finds evidence of efficient earnings management. Specifically, we find that the discretionary accruals of firms that manage earnings to meet the previous year’s profit have a significant positive association with future performance and signals the inside information about the future performance. Further, the results show weak evidence of the relationship between accrual earnings management and future performance among firms meeting zero earnings target. We also study how earnings management relates to the subsequent performance in the absence of earnings benchmarks. The findings show that managers, on average, undertake accrual earnings management to signal future performance.

Keywords: Accrual earnings Management; Earnings benchmarks; Future performance; Opportunistic earnings management; Signalling earnings management (search for similar items in EconPapers)
JEL-codes: M40 M41 M49 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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