Title: Investigating accrual and real earnings management of financially troubled Indian firms

Authors: Sweta Tiwari; Chanchal Chatterjee

Addresses: International Management Institute – Kolkata (IMI-K), 2/4C Judges Court Road, Alipore, Kolkata – 700027, India ' International Management Institute – Kolkata (IMI-K), 2/4C Judges Court Road, Alipore, Kolkata – 700027, India

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.

DOI: 10.1504/AAJFA.2023.133431

Afro-Asian Journal of Finance and Accounting, 2023 Vol.13 No.5, pp.592 - 611

Received: 30 Mar 2022
Received in revised form: 09 Sep 2022
Accepted: 30 Sep 2022
Published online: 15 Sep 2023 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article