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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
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    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)

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    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).

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    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

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