Propping in Business Groups: Prediction Efficacy of Earnings Announcements

Abstract

This study examines the evidences of propping in business groups in India. The article is an empirical study which adopts the event study method to ascertain the price reaction to the earnings announcement by listed group firms. Results indicate that the earnings announcements are perceived to have a positive effect on the financial health of other firms of the group. The cumulative abnormal return (CAR) of the portfolio of nonannouncing firms in a business group is found to be strongly and positively related with that of the announcing firm of that group. The findings of this article will help investors, shareholders and lenders to ex ante forecast the possible improvement in the financial performance of firms of some business groups which maybe going through tough times presently.

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“…The RPT is more likely to be driven by transaction cost issues than by private opportunities issues. Study in India through an event approach found evidence of propping in business groups in India (Maheshwari & Gupta, 2019). The results of the study found that earnings announcements have a positive effect on the financial health of other companies in the business group.…”