Earnings Management in India: Managers’ Fixation on Operating Profits

Nagar, N., & Sen, K. (2016). Earnings management in India: Managers’ fixation on operating profits. Journal of International Accounting, Auditing and Taxation, 26, 1-12.

Pace University Accounting Research Paper No. 2016/15

Posted: 15 Sep 2016

See all articles by Neerav Nagar

Neerav Nagar

Indian Institute of Management Ahmedabad

Kaustav Sen

Pace University - Lubin School of Business

Date Written: September 14, 2016

Abstract

We present evidence that the managers of Indian firms fixate on operating profits, and thus manage such earnings. Specifically, they shift operating expenses to income-decreasing special items in order to inflate operating earnings (McVay, 2006. The Accounting Review, 81(3), 531). We also shed light on another form of classification shifting and find that the managers of Indian firms also engage in netting income-increasing special items against the core expenses in order to inflate core earnings. Given the environment of comparatively weaker corporate governance and investor protection, our results suggest that the magnitude of classification shifting is much more in Indian firms as compared to firms in the United States and East-Asian countries. We also find financial distress to be an important firm characteristic that is likely to influence the managers to engage in classification shifting, and find that financially distressed firms are more likely to engage in both types of classification shifting.

Keywords: Earnings management, Classification shifting, Income netting, Special items, Financial distress, Indian companies

Suggested Citation

Nagar, Neerav and Sen, Kaustav, Earnings Management in India: Managers’ Fixation on Operating Profits (September 14, 2016). Nagar, N., & Sen, K. (2016). Earnings management in India: Managers’ fixation on operating profits. Journal of International Accounting, Auditing and Taxation, 26, 1-12.; Pace University Accounting Research Paper No. 2016/15. Available at SSRN: https://ssrn.com/abstract=2838703

Neerav Nagar (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380015
India

Kaustav Sen

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212 618 6413 (Phone)
212 618 6410 (Fax)

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