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Gross profit manipulation in emerging economies: evidence from India

Manish Bansal (Department of Accounting and Finance, Indian Institute of Management Ranchi, Ranchi, India)
Ashish Kumar (Department of Finance and Accounting, Indian Institute of Management Kashipur, Kashipur, India)
Vivek Kumar (Department of Strategy, Indian Institute of Management Kashipur, Kashipur, India)

Pacific Accounting Review

ISSN: 0114-0582

Article publication date: 9 November 2021

Issue publication date: 5 January 2022

486

Abstract

Purpose

This study aims to explore peer performance as the motivation behind gross profit manipulation through two different channels, namely, cost of goods sold (COGS) misclassification and revenue misclassification.

Design/methodology/approach

Gross profit expectation model (Poonawala and Nagar, 2019) and operating revenue expectation model (Malikov et al., 2018) are used to measure COGS and revenue misclassification, respectively. The panel data regression models are used to analyze the data for this study.

Findings

The study results show that firms engage in gross profit manipulation to meet the industry’s average gross margin, implying that peer performance is an important benchmark that firms strive to achieve through misclassification strategies. Further results exhibit that firms prefer COGS misclassification over revenue misclassification for manipulating gross profit, implying that firms choose the shifting strategy based on the relative advantage of each shifting tool.

Practical implications

The findings suggest that firms that just meet or slightly beat industry-average profitability levels are highly likely to engage in classification shifting (CS). Thus, investors and analysts should be careful when evaluating such firms by comparing them with other firms in the same industry.

Originality/value

First, this study is among earlier attempts to investigate CS motivated by peer performance. Second, this study investigates both tools of gross profit manipulation by taking a uniform sample of firms over the same period and provides compelling evidence that firms prefer one shifting tool over another depending on the relative advantage of each shifting tool.

Keywords

Citation

Bansal, M., Kumar, A. and Kumar, V. (2022), "Gross profit manipulation in emerging economies: evidence from India", Pacific Accounting Review, Vol. 34 No. 1, pp. 174-196. https://doi.org/10.1108/PAR-06-2020-0083

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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