Does earnings management impact firm performance? Empirical evidence from India Online publication date: Thu, 23-Sep-2021
by Sunil Kumar; Nikhil Kaushik; Ashutosh Verma
Afro-Asian J. of Finance and Accounting (AAJFA), Vol. 11, No. 4, 2021
Abstract: The present study examines the association between firm performance and earnings management (EM) of Indian companies. The study used discretionary accruals (DA) as a proxy for EM and measured DA using balance-sheet approach and cash flow approach. DA was estimated using four models namely, Healy model, DeAngelo model, Jones model and Modified Jones model. The sample consists of companies included in the S&P BSE 500 index after excluding banks and financial institutions. The sample period is from 2007 to 2017 and the data is analysed using panel regression. The findings indicate that the relationship is significant and positive in the current year under the balance sheet approach. However, the relationship is significant and negative for the next year's performance under the cash flow approach. It indicates that earnings through accruals positively influence the firm performance in the current year. However, when the accruals reverse in the next year and cash flows reduce, there is negative influence on the firm performance.
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