Does Size Reflect Earnings Management : Evidence from India

Does Size Reflect Earnings Management : Evidence from India Present study endeavors to identify whether there exists any positive relation between the size of the firm and the practice of earnings management in the Indian listed companies. For the purpose of study, a total of 186 non-finance companies were selected out of S & P BSE 500 companies. The period of study is between 2012 – 2016. The ADA model of earnings management is used. Hausman test was applied in order to decide fixed effect model and random effect model.The results indicate that there exists negative association of size of the firms on earnings quality but the impact is insignificant. Introduction Earnings Management by companies is a common phenomenon and can be observed in companies across the world. The companies for a multiple of reasons, have the pressure exceed the benchmark of earnings as what the market estimates and establishes. Consistency in maintaining the benchmark earnings or in exceeding the benchmark earnings enables companies to not only enjoy a high reputation but also ensures premium in their valuations thereby minimizing cost of capital. (SEBI, 2013; Kasznik and McNichols, 2002). It has been observed that when the companies fail to earn their stipulated benchmarks in earnings, they become more prone to severe stock losses (Skinner and Sloan, 2002). Needless to say that in tandem, it affects the compensation that the executives expect (Matsunaga and Park, 2001). As a result, it becomes quite obvious many a times that managers of the companies may use their discretion to manage earnings so that they can meet or beat current-yearmarket estimates. There could be different motives again for managing earnings. The intention can be considered 'positive' (Chaney and Lewis, 1995), if the figures reported are to provide private informationto the market about the prospects of the company (Tucker and Zarowin, 2006) (earning informativeness). (Cahan et al., 2008) quote this as 'efficient manipulation'. There could however be 'opportunistic manipulation' too, if the managers are seen resorting to earnings management with the intention of pursuing their individual goals like better compensations. In this case, there exist strong chances of inferior quality information on earnings of the company and a greater information risk becomes quite evident (Bhattacharya et al., 2003) Healy and Wahlen (1999) had stated three major motives of earnings management: (a) The expectations of capital market and the firm valuation (b) contracts in terms of accounting numbers, and (c) any government regulation. These three motivations trigger the earnings management in firms during multiple events like seasoned equity offerings (Rangan, 1998; and Teoh et al., 1998), during IPOs (Aharony et al., 1993; and Teoh et al., 1998); (Wu, 1997)management buyout (DeAngelo, 1986), takeovers (Christie and Zimmerman, 1994). Earnings management often involves information asymmetry (Rao, Dandale 2008). The accruals in a company could be non-discretionary accruals and discretionary accruals. Non-discretionary accruals are the accounting adjustments by a firm as per the mandatory requirements by the accounting standard-