IDEAS home Printed from https://ideas.repec.org/a/wei/journl/v11y2021i1p78-102.html
   My bibliography  Save this article

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

Author

Listed:
  • Kunnathodi Sudheesh

    (Pondicherry University, Pondicherry, India)

  • Kallumukku Balan Nidheesh

    (Pondicherry University, Pondicherry, India)

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.

Suggested Citation

  • Kunnathodi Sudheesh & Kallumukku Balan Nidheesh, 2021. "Earnings Management to Meet Earnings Benchmarks: The Impact on Future Performance," Economic Research Guardian, Weissberg Publishing, vol. 11(1), pages 78-102, June.
    • Handle: RePEc:wei:journl:v:11:y:2021:i:1:p:78-102
    as

    Download full text from publisher

    File URL: https://www.ecrg.ro/files/p2021.11(1)2021ySI5y7.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Anil Arya & Shyam Sunder & Jonathan Glover, 2002. "Are Unmanaged Earnings Always Better for Shareholders?," Yale School of Management Working Papers ysm295, Yale School of Management, revised 01 Feb 2003.
    2. Ranjitha Ajay & R. Madhumathi, 2015. "Institutional Ownership and Earnings Management in India," Indian Journal of Corporate Governance, , vol. 8(2), pages 119-136, December.
    3. Alhadab, Mohammad & Clacher, Iain, 2018. "The impact of audit quality on real and accrual earnings management around IPOs," The British Accounting Review, Elsevier, vol. 50(4), pages 442-461.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Grzybek, Olga, 2023. "Are accounting choices for intangible assets informative or opportunistic? Evidence from Poland," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 51(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Astrid Rudyanto, 2017. "Audit Firm Reputation versus Auditor Capability: Their Effect on Audit Quality in Indonesia," GATR Journals afr147, Global Academy of Training and Research (GATR) Enterprise.
    2. Habib, Ahsan, 2011. "Audit firm industry specialization and audit outcomes: Insights from academic literature," Research in Accounting Regulation, Elsevier, vol. 23(2), pages 114-129.
    3. Ahmad Almashaqbeh & Hasnah Shaari & Hijattulah Abdul-Jabbar, 2019. "The Effect of Board Diversity on Real Earnings Management: Empirical Evidence From Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(5), pages 495-508, August.
    4. Jiraporn, Pornsit & Miller, Gary A. & Yoon, Soon Suk & Kim, Young S., 2008. "Is earnings management opportunistic or beneficial? An agency theory perspective," International Review of Financial Analysis, Elsevier, vol. 17(3), pages 622-634, June.
    5. Otniel Safkaur & Nunuy Nurafiah & Sugiono Paulus & Muhammad Dahlan, 2019. "Good or Bad Financial Reporting Can Cause Changes in Company Management," International Journal of Economics and Financial Issues, Econjournals, vol. 9(4), pages 250-258.
    6. Bo Sun, 2009. "Asset returns with earnings management," International Finance Discussion Papers 988, Board of Governors of the Federal Reserve System (U.S.).
    7. Ung, Lik-Jing & Brahmana, Rayenda & Puah, Chin Hong, 2014. "Earnings Management, Ownership Expropriation and Brokerage Fee of Malaysian Property Companies," MPRA Paper 63427, University Library of Munich, Germany.
    8. Isaac Selasi Awuye & François Aubert, 2022. "The impact of leverage on earnings management and the trade-off between discretionary accruals and real earnings management," Post-Print hal-03824383, HAL.
    9. Lin, Wen-Chun & Liao, Tsai-Ling, 2018. "Managerial reporting behavior around exchange switching: Consideration of current and future performance," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 218-237.
    10. Chi, Jianxin (Daniel) & Gupta, Manu, 2009. "Overvaluation and earnings management," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1652-1663, September.
    11. Lucy F. Ackert & Bryan K. Church & Kirsten Ely, 2010. "Weak and Strong Individual Forecasts: Additional Experimental Evidence," Chapters, in: Brian Bruce (ed.), Handbook of Behavioral Finance, chapter 14, Edward Elgar Publishing.
    12. Florian Eugster & Alexander F. Wagner, 2021. "Earning investor trust: The role of past earnings management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(1-2), pages 269-307, January.
    13. Mahdi Salehi & Grzegorz Zimon & Hossein Tarighi & Javad Gholamzadeh, 2022. "The Effect of Mandatory Audit Firm Rotation on Earnings Management and Audit Fees: Evidence from Iran," JRFM, MDPI, vol. 15(3), pages 1-20, February.
    14. Mihai CARP & Iuliana Eugenia GEORGESCU, 2019. "The Influence of Audit Opinion on the Degree of Real Earnings Management. The Case of Romanian Listed Companies," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 17(156), pages 666-666.
    15. Salem, Rami & Usman, Muhammad & Ezeani, Ernest, 2021. "Loan loss provisions and audit quality: Evidence from MENA Islamic and conventional banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 345-359.
    16. Gao, Pingyang, 2008. "Disclosure Quality, Cost of Capital, and Investors’ Welfare," MPRA Paper 9478, University Library of Munich, Germany, revised Jun 2008.
    17. Isaac Selasi Awuye, 2022. "The impact of audit quality on earnings management: Evidence from France," Post-Print hal-03824396, HAL.
    18. Eiler, Lisa A. & Filzen, Joshua J. & Jackson, Mark & Tama-Sweet, Isho, 2021. "Real earnings management and the properties of analysts' forecasts," Advances in accounting, Elsevier, vol. 55(C).
    19. Bedford, Anna & Bugeja, Martin & Czernkowski, Robert & Bond, David, 2023. "Is the effect of shared auditors driven by shared audit partners? The case of M&As," The British Accounting Review, Elsevier, vol. 55(2).
    20. Kenneth J. Hunsader & Gwendolyn Pennywell, 2011. "Earnings management and the stock market response to the Sarbanes‐Oxley Act based on a measure of competitive strategy," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 10(4), pages 368-384, November.

    More about this item

    Keywords

    Accrual earnings Management; Earnings benchmarks; Future performance; Opportunistic earnings management; Signalling earnings management;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wei:journl:v:11:y:2021:i:1:p:78-102. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mihai Mutascu (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.