Title: Earnings management through overproduction and subsequent performance: an empirical study in Pakistan

Authors: Naila Tabassum; Ahmad Kaleem; Mian Sajid Nazir

Addresses: COMSATS Institute of Information Technology, M.A. Jinnah Building Defence Road, Off Raiwind Road, Lahore, Pakistan ' COMSATS Institute of Information Technology, M.A. Jinnah Building Defence Road, Off Raiwind Road, Lahore, Pakistan ' COMSATS Institute of Information Technology, M.A. Jinnah Building Defence Road, Off Raiwind Road, Lahore, Pakistan

Abstract: This study aims to find the impact of real earnings management on future financial performance. Abnormal cost of production is considered as proxy of real earnings management which is calculated by using model of Dechow et al. (1998). It has been investigated that how abnormal cost of production affects financial performance measures; return on asset (ROA), return on equity (ROE) and earning per share (EPS) and price to earnings ratio (PE). Manufacturing sector of Pakistan is selected for analysis and data is collected from year 2004 to 2011. Generalised least square regression has been applied for analysis. It has been revealed that firms engaged in real earnings management through overproduction face lower financial performance in subsequent years.

Keywords: real earnings management; sales manipulation; financial performance; Pakistan; manufacturing industry; abnormal production costs; return on assets; ROA; earnings per share; EPS; return on equity; ROE; price to earnings ratio; PE ratio; generalised least squares; GLS; overproduction.

DOI: 10.1504/IJICBM.2014.064693

International Journal of Indian Culture and Business Management, 2014 Vol.9 No.3, pp.267 - 282

Received: 18 May 2013
Accepted: 04 Jul 2013
Published online: 13 Sep 2014 *

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