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Earnings management in India: Managers’ fixation on operating profits

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  • Nagar, Neerav
  • Sen, Kaustav

Abstract

We present evidence that the managers of Indian firms fixate on operating profits, and thus manage such earnings. Specifically, they shift operating expenses to income-decreasing special items in order to inflate operating earnings (McVay, 2006. The Accounting Review, 81(3), 531). We also shed light on another form of classification shifting and find that the managers of Indian firms also engage in netting income-increasing special items against the core expenses in order to inflate core earnings. Given the environment of comparatively weaker corporate governance and investor protection, our results suggest that the magnitude of classification shifting is much more in Indian firms as compared to firms in the United States and East-Asian countries. We also find financial distress to be an important firm characteristic that is likely to influence the managers to engage in classification shifting, and find that financially distressed firms are more likely to engage in both types of classification shifting.

Suggested Citation

  • Nagar, Neerav & Sen, Kaustav, 2016. "Earnings management in India: Managers’ fixation on operating profits," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 26(C), pages 1-12.
    • Handle: RePEc:eee:jiaata:v:26:y:2016:i:c:p:1-12
    DOI: 10.1016/j.intaccaudtax.2016.02.003
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    Cited by:

    1. Priyesh Valiya Purayil & Jijo Lukose P. J., 2022. "Does cross‐border acquisition reduce earnings management of emerging market acquirers? Evidence from India," International Review of Finance, International Review of Finance Ltd., vol. 22(1), pages 143-168, March.
    2. Nagar, Neerav & Desai, Naman & Jacob, Joshy, 2021. "Do Big 4 auditors limit classification shifting? Evidence from India," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 42(C).
    3. Kalyani Mulchandani & Ketan Mulchandani, 2022. "Does institutional ownership limit classification shifting: evidence from Indian firms," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(4), pages 466-477, December.
    4. Boahen, Eric O. & Mamatzakis, Emmanuel C., 2021. "What are the effects of culture and institutions on classification shifting in India?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 44(C).
    5. Desai, Naman & Nagar, Neerav, 2016. "A research note: Are auditors unable to detect classification shifting or merely not willing to report it? Evidence from India," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(2), pages 111-120.
    6. He, Meng & Bai, Xuelian & Zhang, Junrui, 2024. "Does short selling reduce classification shifting?—— Exploration of market-oriented governance mechanism," International Review of Financial Analysis, Elsevier, vol. 93(C).

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