Value relevance of managed earnings in Indian firms: an impact analysis of IFRS convergence using dynamic panel models

Keywords: earnings management, value relevance, IFRS, IndAS, discretionary accruals, endogeneity

Abstract


The study explores the relationship between earnings management and value relevance of accounting information of Indian listed firms by investigating three different modes of earnings management – total, short-term and long-term discretionary accruals. Additionally, the study investigates the impact of the converged International Financial Reporting Standards (IFRS), known as Indian Accounting Standards (IndAS), on earnings management which in turn influences value relevance. This study is the first in India to analyse the differential effects of short-term and long-term earnings management on value relevance and to address the endogeneity issue in the price value relevance model through dynamic panel modelling while controlling for the use of the IndAS. The study finds a significant effect of both short-term and long-term accruals management on value relevance and a positive influence of IndAS on the relationship between earnings management and firm value

References

Achleitner, A.K., Günther, N., Kaserer, C., & Siciliano, G. (2014). Real earnings management and accrual-based earnings management in family firms. European Accounting Review, 23 (3), 431–461.

Agrawal, K., & Chatterjee, C. (2015). Earnings Management and Financial Distress: Evidence from India. Global Business Review, 16, 140–154.

Al-Shattarat, B. (2021). The consequence of earnings management through discretionary accruals on the value relevance in Saudi Arabia. Cogent Business & Management, 8 (1), 1886473.

Ball, R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and Business Research, 36 (1), 5–27.

Bansal, M., & Garg, A. (2021). Do high-quality standards ensure higher accounting quality? A study in India. Accounting Research Journal, 34 (6), 597–613.

Barth, M.E., Beaver, W.H., & Landsman, W.R. (2001). The relevance of the value relevance literature for financial accounting standard setting: another view. Journal of Accounting and Economics, 31 (1-3), 77-104.

Barth, M.E., Li, K., & McClure, C.G. (2023). Evolution in Value Relevance of Accounting Information. The Accounting Review, 98 (1), 1–28.

Beaver, W.H. (2002). Perspectives on Recent Capital Market Research. Source: The Accounting Review, 77 (2), 453–474.

Callao, S., & Jarne, J.I. (2010). Have IFRS affected earnings management in the European Union? Accounting in Europe, 7 (2), 159–189.

Chen, H., Tang, Q., Jiang, Y., & Lin, Z. (2010). The Role of International Financial Reporting Standards in Accounting Quality: Evidence from the European Union. Journal of International Financial Management and Accounting, 21 (3), 220–278.

Christensen, H.B., Lee, E., Walker, M., & Zeng, C. (2015). Incentives or Standards: What Determines Accounting Quality Changes around IFRS Adoption? European Accounting Review, 24 (1), 31–61.

Dechow, P.M., Sloan, R.G., & Sweeney, A.P. (1995). Detecting Earnings Management. The Accounting Review, 70 (2), 193–225.

Ecker, F., Francis, J., Olsson, P., & Schipper, K. (2013). Estimation sample selection for discretionary accruals models. Journal of Accounting and Economics, 56 (2–3), 190–211.

Gakhar, D.V. (2014). Earnings management practices in India: A study of auditor’s perception. Journal of Financial Crime, 21 (1), 100–110.

Ghalke, A., Chakravorty, C., & Rao, S.V. D. N. (2018). Earnings management in IPO bound firms: Evidence from Indian SME exchanges. Asian Economic and Financial Review, 8 (8), 1126–1139.

Ghazali, A.W., Shafie, N.A., & Sanusi, Z.M. (2015). Earnings Management: An Analysis of Opportunistic Behaviour, Monitoring Mechanism and Financial Distress. Procedia Economics and Finance, 28, 190–201.

Goel, S. (2018). Earnings management in corporate enterprises in India: A test for multi-nationality, reputation and related variables. International Journal of Emerging Markets, 13 (6), 1820–1834.

Healy, P.M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7 (1-3), 85–107.

Jackson, A.B. (2018). Discretionary Accruals: Earnings Management.. or Not? Abacus, 54(2), 136–153.

Jones, J.J. (1991). Earnings Management During Import Relief Investigations. Journal of Accounting Research, 29 (2), 193–228.

Kothari, S.P., Leone, A.J., & Wasley, C.E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39 (1), 163–197.

Kouki, A. (2018a). IFRS and value relevance : A comparison approach before and after IFRS conversion in the European countries. Journal of Applied Accounting Research, 19 (1), 60–80.

Kouki, A. (2018b). Mandatory IFRS adoption, investor protection and earnings management: A data analysis of Germany, France and Belgium listed companies. International Journal of Accounting and Information Management, 26 (1), 187–204.

Lee, H.Y., & Son, M. (2009). Earnings announcement timing and earnings management. Applied Financial Economics, 19 (4), 319–326.

Marquardt, C.A., & Wiedman, C.I. (2004). The effect of earnings management on the value relevance of accounting information. Journal of Business Finance and Accounting, 31(3–4), 297–332.

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

Noronha, C., Zeng, Y., & Vinten, G. (2008). Earnings management in China: An exploratory study. Managerial Auditing Journal, 23 (4), 367–385.

Ohlson, J.A. (1995). Earnings, book values and dividends in equity valuation. Contemporary Accounting Research, 11 (2), 661–687.

Ratnaningrum, R., Rahmawati, R., Djuminah, D., & Widagdo, A. K. (2021). The Value Relevance of Earnings in the Presence of Earnings Management: Indonesia as Evidence. Global Business Review, in press.

Soliman, W.S.M.K., & Ali, K.M. (2020). An investigation of the value relevance of deferred tax: the mediating effect of earnings management. Investment Management and Financial Innovations, 17 (1), 317–328.

Shette, R., Kuntluru, S., & Korivi, S.R. (2016). Opportunistic earnings management during initial public offerings: Evidence from India. Review of Accounting and Finance, 15 (3), 352–371.

Whelan, C., & Mcnamara, R. (2004). The Impact of Earnings Management on the Value-relevance of Financial Statement Information. Retreived from: https://ssrn.com/abstract=585704

Zeghal, D., Chtourou, S.M., & Fourati, Y.M. (2012). The effect of mandatory adoption of IFRS on earnings quality: Evidence from the European union. Journal of International Accounting Research, 11 (2), 1–25.

Published
2024/05/20
Section
Original Scientific Paper