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Firm Life Cycle and Real-Activity Based Earnings Management

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  • Nagar, Neerav
  • Radhakrishnan, Suresh

Abstract

We examine real-activity based earnings management, i.e., cuts in discretionary innovation/marketing spending and overproduction for meeting the earnings benchmark of avoiding losses across firms’ life cycle. We use the cash flow components to classify a firm’s life cycle. We hypothesize and find that firms in the growth and mature stages exhibit real-activity based earnings management to meet earnings target of avoiding losses; but firms in the introductory stage do not. We also hypothesize and find that such real-activity based earnings management to meet the earnings benchmark of avoiding losses is associated with future performance for mature firms, but not so for growth firms. Collectively, our evidence shows the importance of considering firm’s life cycle when examining real-activity based earnings management.

Suggested Citation

  • Nagar, Neerav & Radhakrishnan, Suresh, 2015. "Firm Life Cycle and Real-Activity Based Earnings Management," IIMA Working Papers WP2015-12-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    • Handle: RePEc:iim:iimawp:13767
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    References listed on IDEAS

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    Cited by:

    1. Habib, Ahsan & Hasan, Mostafa Monzur, 2019. "Corporate life cycle research in accounting, finance and corporate governance: A survey, and directions for future research," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 188-201.
    2. Ammar Hussain & Minhas Akbar & Muhammad Kaleem Khan & Ahsan Akbar & Mirela Panait & Marian Catalin Voica, 2020. "When Does Earnings Management Matter? Evidence across the Corporate Life Cycle for Non-Financial Chinese Listed Companies," JRFM, MDPI, vol. 13(12), pages 1-19, December.
    3. Tom Van Caneghem & Walter Aerts & Oveis Madadian, 2021. "Peer‐based comparison and firms' discretionary cost decisions," Australian Economic Papers, Wiley Blackwell, vol. 60(1), pages 163-185, March.
    4. Qi Yang & Dejun Wu, 2020. "Does an item change trigger earnings management? Evidence from asset disposal income in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(5), pages 4593-4619, December.

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