Earnings Management in India: Managers’ Fixation on Operating Profits

• In Event: Financial Accounting and Reporting III

Abstract

We present evidence that managers of Indian firms fixate on operating profits, and thus manage such earnings. Specifically, they shift operating expenses to income-decreasing special items to inflate operating earnings (McVay 2006). We also shed light on another form of classification shifting and find that managers of Indian firms also engage in netting income-increasing special items against the core expenses to inflate core earnings. This income netting goes alongside the shifting of operating expenses to income-decreasing special items. Further, we link use of classification shifting with financial distress and show that distressed firms are more likely to engage in both types of classification shifting.

Authors

• Neerav Nagar, Indian Institute of Management Calcutta

• Kaustav Sen, Pace University