Forcing responsibility? Examining earnings management induced by mandatory corporate social responsibility: evidence from India

Bansal, Manish; Kumar, Vivek

doi:10.1108/raf-06-2020-0151

Cited by 50 publications

(23 citation statements)

References 40 publications

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“…Following prior studies (for instance, Makarem and Roberts, 2020; Zang, 2012), we measure REM through abnormal discretionary expenditure ( A_DISX ) and abnormal production costs ( A_PROD ). Following prior studies (for instance, Bansal and Ali, 2021; Bansal and Kumar, 2021), we measure AEM through abnormal accruals ( A_ACC ), where A_ACC is estimated through the performance-adjusted modified Jones model (Kothari et al , 2005). Following Joo and Chamberlain (2017), we measure expense shifting by including a dummy variable – ES that takes value equals one for firms having positive unexpected core earnings ( UE_CE ), and zero otherwise.…”

Section: Methodsmentioning

confidence: 99%

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

Bansal

2021

JAAR

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PurposeThe study aims to examine the impact of the firm life cycle on the misclassification practices of Indian firms. The study also examines the impact of International Financial Reporting Standards (IFRS) on the misclassification practices of Indian firms.Design/methodology/approachThe study uses Dickinson (2011) cash flow patterns to classify firm-years under life cycle stages. Two forms of misclassification, namely revenue misclassification and expense misclassification have been examined in this study.FindingsBased on a sample of 19,268 Bombay Stock Exchange (BSE) firm-years spanning over ten years from March 2010 to March 2019, results show that firms operating at high (low) life cycle stage are more likely to be engaged in revenue (expense) misclassification, implying that firms substitute between the classification shifting tools depending upon ease and needs of each tool. Further, our results demonstrate that the magnitude of expense shifting has been significantly increased among test firms (firms reporting under IFRS) relative to benchmark firms (firms reporting under domestic GAAP) in the post-IFRS adoption period, implying that adoption of IFRS negatively affects the accounting quality of Indian firms.Research limitations/implicationsThe study considers only two main forms of misclassification, namely revenue and expense misclassification. However, future research may explore the cash flow misclassification.Practical implicationsThe findings suggest that standard-setting authorities make more mandatory disclosure requirements under IFRS to curb the corporate misfeasance of classification shifting.Originality/valueFirst, the study is among the earlier attempts to examine the impact of the firm life cycle on misclassification practices. Second, the study explores the unique Indian institutional settings concerning the phased-manner implementation of IFRS and examines its impact on the classification shifting practices of firms.

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Section: Methodsmentioning

confidence: 99%

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

Bansal

2021

JAAR

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“…The outcome of the study contributes to the literature in both theoretical and practical spheres. First, our study enriches the literature on accounting manipulations (for instance, Achleitner et al , 2014; Bansal and Kumar, 2021; Cohen et al , 2008; Khunkaew and Qingxiang, 2019; Zang, 2012; Zhu et al , 2015) by highlighting the differential impact of downward and upward REM on stock returns. This is among the earlier attempts that considered the upward and downward forms of earnings management while examining the association between REM and stock returns.…”

Section: Introductionmentioning

confidence: 61%

“…If it exists, then how does it impact the stock returns. Following Bansal and Kumar (2021), we measure AEM through abnormal accruals (ACC), where ACC is calculated through the performance-adjusted modified Jones model (Kothari et al , 2005). The model is as follows:where ACC denotes total accruals, measured as the difference between net income and operating cash flows.…”

Section: Methodsmentioning

confidence: 99%

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Betting against real earnings management

Bansal

Ali

2022

ARA

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PurposeThe study presents the zero investment strategies based on the pricing impact of real earnings management (REM) on stock returns after taking into account the direction and endogeneity nature of REM.Design/methodology/approachThe authors use standard portfolio methodology and Fama–Macbeth cross-sectional regression to analyze the data for this study. Both upward and downward form of REM has been examined. Accrual earnings management (AEM) has been controlled while examining the association between REM and stock returns.FindingsThe findings demonstrate that the REM anomaly exists in the Indian equity market and is consistent under different market conditions and investment horizons. It is robust after controlling for cross-sectional effects and AEM. Our subsequent analysis suggests that a decile-based zero investment portfolio strategy based on REM loadings generates an annual excess return of 17.90%. The presented annual excess return is highest among quantile and mean-based investment strategies. Further, the authors find that REM sorted proposed investment strategies outperform the AEM sorted investment strategies in all spheres.Practical implicationsThe findings suggest that investors can form an arbitrage profitable investment strategy by taking a long position in the bottom 10% of negative REM stocks, and a short position in the top 10% of positive REM stocks.Originality/valueThis is the first study that examines the pricing impact of REM on stock returns and provides zero investment strategies by betting against REM.

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“…Similar results appeared in the manufacturing sector of the economy. Hassan [32] analysed the manufacturing sector using 32 manufacturing related firms from 2007 to 2011. Hassan also used the modified Jones model as proxy for the quality of table reported in the annual statement and after robust statistical tests the results indicated that levered firms have higher earnings quality and that the relationship is proportionate.…”

Section: Empirical Evidencesmentioning

confidence: 99%

Leverage of Firms and Earnings Management Practices in Nigeria Pre and Post IFRS Adoption Periods

Enakirerhi

Ewiwile

Wobo

2022

AJEBA

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It has been argued that taking on more leverage in firm’s capital structure will force managers to disclose more information in line with agency theory and theoretically, this is expected to increase in postIFRS periods. Whether, this theoretical assertion holds in the case of Nigeria is subject to academic debate. Thus, the paper examines the association between leverage and earnings manipulative practice of firms in Nigeria pre and postIFRS periods and attempt to test the assertion of agency theory that higher leverage will be beneficial to improved earnings quality dues to pressure on managers by bondholders. The study incorporated data for 87 listed firms on the floor of the Nigeria Stock Exchange for 10 years, 5 years preIFRS (2007 to 2011) and 5 years postI FRS (2012 to 2016) making 870 firm year observations. It disaggregated the periods into pre and postIFRS to enable the researcher test for the effect of adoption. The panel regressions estimate (Random effect model) was used to test the effect of the association between the independent and dependent variables. The results deviate from norms and show that although taking on leverage in the capital structure of firms could be beneficial to earnings quality in line with agency theory in preIFRS, this benefit had been eroded after Nigeria’s adoption of the global standards. In postIFRS, leverage has a positive association, indicating that more leverage resulted in increased manipulation. Performance of firms proved to be an important factor affecting earnings quality as the results showed that lower performance was likely associated with increased earnings management practice post IFRS. The study is original and deviate from norms, puncturing the beliefs that IFRS adoption would limit managers’ ability to manipulate earnings. It also found, against popular assertion, that increased leverage may not be associated with reduced earnings manipulative practices. Leverage is unlikely to prevent earnings management practices.

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Forcing responsibility? Examining earnings management induced by mandatory corporate social responsibility: evidence from India

Cited by 50 publications

References 40 publications

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

Betting against real earnings management

Leverage of Firms and Earnings Management Practices in Nigeria Pre and Post IFRS Adoption Periods

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