The IUP Journal of Accounting Research and Audit Practices:
Leverage Effect on Earnings Management: Evidence from India

Article Details
Pub. Date : Oct, 2018
Product Name : The IUP Journal of Accounting Research and Audit Practices
Product Type : Article
Product Code : IJARAP21810
Author Name : Nikhil Kaushik and Sunil Kumar
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 14

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Abstract

This study investigates the relationship between leverage and earnings management for Indian companies. Both the classifications of earnings management, i.e., Accruals Earnings Management (AEM) and Real Earnings Management (REM), are used in the study. For measuring AEM, cross-sectional Jones model and modified Jones model are used in the study, whereas to cover REM, the study considers models such as abnormal cash flow from operations and abnormal production cost. Panel data regression models are applied for the period from 2007 to 2017 on a sample size of 278 companies listed on Bombay Stock Exchange of India, taking S&P BSE 500 index as a benchmark (excluding banks and financial institutions). The results show no significant evidence of the role of leverage in earnings management for Indian companies as coefficients of the regression models are insignificant. The reason for insignificant results could be the implementation of revised Clause 49 of the Listing Agreement by Securities and Exchange Board of India (SEBI) in 2004, which brings fairness and reliability to financial reports of Indian companies.


Description

The most essential item in the financial statement of any company is earnings. It indicates the company's rendezvous in value-added activities. An increase in earnings signifies an increase in firm value, while decreased earnings indicate a decline in firm value (Lev, 1989). Knowing the importance of earnings, the company management is keen to manage earnings in a meaningful manner, using the discretion provided by the accounting standards.


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