Real earnings management and firm performance an empirical study in Indian context

Abstract

The study examines two REM practices, i.e., overproduction and alteration in spending on discretionary expenses, viz., research and development expenses (RandD) and selling, general and administrative expenses (SGandA). Further, it examines three components of SGandA, viz., marketing expenses(MRK), staff welfare and training expenses(WandT), and other general and administrative expenses(OGandA), and five components of MRK, viz., advertisement expenses (ADV), distribution expenses (DIST), travelling expenses (TRAV), other marketing expenses (OMRK), and rebates, discount, and sales promotions expenses (RDSP). The study analyses panel data of Indian companies listed on National Stock Exchange during the period from 2000 to 2016. newlineThe results suggest that Indian firms overproduce and reduce spending on SGandA to meet earnings benchmarks. Evidence suggests reduction in spending on all components of SGandA, i.e., MRK, WandT, and OGandA, and three components of MRK, i.e., TRAV, OMRK, and RDSP, to avoid losses. However, to sustain last year s earnings, reduction is observed only in WandT. Further, though contrary to hypotheses in some cases, the results indicate that REM practices in firms having the motivation to meet earnings benchmarksvary due to low liquidity, high operating leverage, stringent debt covenants, and low tangibility. Lastly, the results indicate negative implications of REM practices on future performance of firms having the motivation to avoid losses. However, implications are mixed for sustaining last year s earnings benchmark. newline newline