Firm Life Cycle and Real-Activity Based Earnings Management

42 Pages Posted: 10 Dec 2015 Last revised: 1 May 2017

See all articles by Neerav Nagar

Neerav Nagar

Indian Institute of Management Ahmedabad

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Date Written: May 1, 2017

Abstract

We examine real-activity based earnings management, i.e., cuts in discretionary spending to report small profits, across introductory, growth and mature stage firms. We use the cash flow components to classify a firm’s life cycle. We predict and find that firms in the mature stage, on average, cut discretionary spending to report small profits; but firms in the introductory and growth stages do not. We also show the importance of considering the different earnings bins in the research design. Our study shows the importance of considering firm’s life cycle and calibrating suspect firms appropriately when examining real-activity based earnings management.

Keywords: Small profit, Large profit, Small losses, Small cuts, Large cuts

Suggested Citation

Nagar, Neerav and Radhakrishnan, Suresh, Firm Life Cycle and Real-Activity Based Earnings Management (May 1, 2017). Available at SSRN: https://ssrn.com/abstract=2701680 or http://dx.doi.org/10.2139/ssrn.2701680

Neerav Nagar

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380015
India

Suresh Radhakrishnan (Contact Author)

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

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