Assaying the Impact of Firm's Growth and Performance on Earnings Management: An Empirical Observation of Indian Economy

Abstract

Considering the connotation of true and fair financial disclosure practices and corporate governance mechanism in the quickly improving economic scenario, this study attempted to analyses the nature and extent of earnings management practices and also to assess the impact of firm's growth and performance on earnings management through discretionary accruals estimation in India. The study uses cross-sectional modified Jones model to estimate discretionary accruals, a proxy for earnings management. A sample of 756 firm-year observations from non-financial corporate sector (banking and other financial sector was not considered for distinct governance and reporting practices) for nine years from 2007 to 2015, was considered based on some accounting and market measurement criteria from Capitalineplus Corporate Database. The study analyzed the panel data using a fixed effect model to estimate the influence of firm's growth and performance over the discretionary accruals. The findings of the study affirmed that there is an existence of earnings management practices across the Indian nonfinancial firms under study, which followed a mixed trend. Regression analysis of the study witnessed that growth of the firm is positively associated with discretionary accruals while performance is negatively correlated. Nonetheless, among the other control variables viz; firm's size and age were also found statistically significant influencing variables.