Do earnings management practices define the readability of the financial reports in India?

Abstract

Using a sample of the listed firms over the period 2007-2019, we examine the impact of financial statement readability on the earnings management in a large emerging economy, India. Besides, we test for the readability of financially distressed and financially constrained firms. We use the fog index to measure the readability of the Management Discussion and Analysis (MDA) section of the annual report, and earnings management is measured using the Jones model. Our results indicate that the firms practicing earning management activities prepare lesser readable financial reports. Our results remain the same after adding the firm-fixed effect to control for firm-specific characteristics. Thus, more financial manipulation practices by the firm make the financial reports more complex to comprehend.

A Review Analysis of Earnings Management Report Disclosure

“…Bradley et al (2021) findings demonstrated a strong positive relationship between unverifiable net assets and reading difficulties for earnings management. Businesses used profitable management techniques to generate less readable financial reporting (Arora & Chauhan, 2021). According to Pakawaru et al (2021) study, management conceals unethical behaviour from stakeholders by using CSR disclosure.…”

“…journal.ump.edu.my/jgi ◄ Boskou et al, 2020, Campa, 2020, El-Din et al, 2021 Strong positive relationship between difficulties and earnings management. Bradley et al, 2021, Arora andChauhan, 2021 CSR Management conceals unethical behaviour by using CSR disclosure. Pakawaru et al, 2021, Mahmood et al, 2020 No relationship between culture and earnings management.…”

“…One, Generally Accepted Accounting Principles (GAAP), and second, the International Financial Reporting Standard (IFRS). It has been used extensively to examine several matters such as taxation (Folorunso & Lokanan, 2022;Fernando et al, 2021), board characteristics (Khan & Kamal, 2022;Almarayeh et al,2022), stock return (Ellahie & Peng, 2021;Derun & Mysaka, 2021;Al Mamun et al, 2021;Bouaziz et al, 2020), readability (El-Din et al, 2021;Liu & Liu, 2021;Bradley et al,2021;Arora & Chauhan, 2021;Napier & Stadler, 2020), corporate social responsibility (Habbash & Haddad, 2019), and award (Deng et al, 2020) in last four years.…”

“…El-Din et al ( 2021) believe there is a connection between information overload and reporting complexity with the influence of a firm's profitability and earnings management techniques, especially in a large emerging economy such as India (Arora & Chauhan, 2021). This could provide insight into why investors fail to swiftly and objectively digest accruals information beyond the original naive investor fixation explanation (Liu & Liu, 2021).…”

“…The effect of unverifiable net assets on the reading difficulties of annual reports is investigated in Bradley et al (2021) study. They anticipate that annual reports of companies with more speculative assets and liabilities will be harder to read if it has a linked with agency conflicts such as financially distressed and financially constrained firms (Arora & Chauhan, 2021). The concept of revenue recognition has changed significantly and not merely to better reflect the company's updated accounting rules.…”