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Open Access
Article
Publication date: 13 December 2022

Manish Bansal

The study aims to investigate how the presence and absence of institutional equivalents (interaction of industry peers and local peers) affect the earnings management practices of…

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Abstract

Purpose

The study aims to investigate how the presence and absence of institutional equivalents (interaction of industry peers and local peers) affect the earnings management practices of firms.

Design/methodology/approach

The study uses discretionary accruals to operationalize earnings management. A sample of 18,744 Bombay Stock Exchange (BSE) listed firm years spanning over 12 financial years (March 2010–March 2021) has been considered and analyzed through panel data regression models.

Findings

The author’s results show that the earnings management practices of a firm's institutional equivalents and the firm's own earnings management are positively associated, implying that firms closely follow their institutional equivalents. This association is found to be more pronounced among focal firms when the difference between the earnings management levels of industry peers and local peers is greater. Further, the author find that large firms aggressively imitate their industry peers and local peers, whereas profitability does not influence their imitation behavior.

Practical implications

The author’s findings have implications for understanding peer imitation processes, particularly when firms face increasingly multifaceted institutional environments. It suggests auditors and analysts take into account the earnings management practices of local and industry peers while analyzing the client's financial statements and making forecasts, respectively.

Originality/value

The study is among the pioneering attempts to explore the domain of earnings management from the lens of institutional equivalence and provides compelling evidence that the interaction of industry peers and local peers impacts the earnings management practices of firms.

Details

Asian Journal of Accounting Research, vol. 8 no. 2
Type: Research Article
ISSN: 2443-4175

Keywords

Article
Publication date: 23 March 2022

Manish Bansal

The study aims at examining the relationship between the forms of misclassification practices, namely expense shifting and revenue shifting. In particular, the study aims at…

Abstract

Purpose

The study aims at examining the relationship between the forms of misclassification practices, namely expense shifting and revenue shifting. In particular, the study aims at identifying the form of shifting that has been preferred by firms to meet the industry average profitability.

Design/methodology/approach

Core earnings and operating revenue expectation models are used to measure expense shifting and revenue shifting, respectively. The panel fixed-effects models are used to control for unobserved heterogeneity across industries and time.

Findings

Based on a sample of Bombay Stock Exchange-listed firms, the author finds that firms prefer expense shifting over revenue shifting to meet industry average profitability, implying that firms choose the shifting tool based on the relative advantage. Further, the findings deduced from the empirical results demonstrate that firm life cycle and mandatory adoption of International Financial Reporting Standards (IFRS) moderates the relationship between shifting forms and industry average profitability. However, the negative impact of IFRS on shifting practices is found to be less pronounced among BigN audit firms.

Originality/value

The study is among the pioneering attempt to document the substitution relationship between shifting forms. It is the first study that examines a form of classification shifting, where gross profit and core earnings both change as an effect of misclassification.

Details

South Asian Journal of Business Studies, vol. 13 no. 1
Type: Research Article
ISSN: 2398-628X

Keywords

Article
Publication date: 17 April 2023

Manish Bansal

The study aims to investigates which form of classification shifting is preferred by firms to avoid the violation of debt covenants and whether the higher-audit quality…

Abstract

Purpose

The study aims to investigates which form of classification shifting is preferred by firms to avoid the violation of debt covenants and whether the higher-audit quality constraints the shifting practices of firms incentivized to avoid covenant violations or not.

Design/methodology/approach

A sample of 1,644 Bombay Stock Exchange (BSE)-listed firms during the period 2009–2021 has been used in this study and tested through panel data regression models. Two forms of classification shifting, namely expense shifting and revenue shifting have been taken into account. The findings are validated through the propensity-score matching technique.

Findings

The findings deduced from the empirical evidence demonstrate that firms prefer revenue shifting over expense shifting to avoid covenant violations, consistent with the notion of the ease-need-advantage-based shifting framework, where firms are found to prefer a shifting tool with greater relative advantage. Further, the author finds that superior audit quality has a constraining effect on expense shifting, but not on revenue shifting, indicating the partial effectiveness of high-quality auditors in curbing the corporate misfeasance of classification shifting. These results are robust to the problem of endogeneity and self-selection bias.

Originality/value

The paper provides new evidence on debt market incentives behind classification shifting, where firms are found to substitute classification shifting forms to avoid covenant violations. Further, the study is among pioneering attempts to investigate the impact of audit quality on revenue shifting and document the non-constraining effect.

Details

Managerial Finance, vol. 49 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 6 June 2023

Manish Bansal

To report inflated operating performance indicators, such as operating revenue and operating profit, managers vertically reposition revenue and expense items inside the income…

Abstract

Purpose

To report inflated operating performance indicators, such as operating revenue and operating profit, managers vertically reposition revenue and expense items inside the income statement. This study aims to investigate the relationship between credit market incentives and these practices.

Design/methodology/approach

This study examined a sample of 1,592 Bombay Stock Exchange-listed companies from 2009 to 2021 and tested them using panel data regression models. The propensity score matching method and different measurements of classification shifting practices are used to validate the results.

Findings

The conclusions drawn from the empirical data show that firms prefer revenue shifting over expense shifting to prevent debt covenant violations. It shows that the firm’s classification-shifting practices are driven by credit market incentives. This finding is consistent with the notion of positive accounting theory that firms engage in classification shifting (earnings management) to avoid violation of debt covenants. Further, the firm’s preference for revenue shifting is in line with the ease-need-advantage-based shifting framework where firms choose the shifting tool based on costs and constraints associated with each tool.

Practical implications

The finding suggests that if managers heavily rely on revenue shifting to avoid debt covenant violations, the firm may end up breaking these covenants based on its actual operating performance. Managers may use aggressive accounting techniques to prevent covenant violations, which can be a warning indicator of financial difficulties or operational problems. It highlights the necessity for creditors and investors to carefully evaluate a company’s financial stability outside of the financial statements that are publicly disclosed. Authorities should create separate forensic accounting standards for auditors to check revenue items and stop the corporate misfeasance of revenue shifting.

Originality/value

The study is among the earlier attempts to provide empirical evidence on credit market incentives behind classification shifting practices. It is the first study that documents the substitution relationship between classification shifting forms for avoiding violation of debt covenants.

Details

International Journal of Accounting & Information Management, vol. 31 no. 3
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 13 July 2023

Manish Bansal

The study examines the impact of a recent mandate (Section 149 of the Indian Companies Act, 2013, where firms of a certain size are mandated to appoint at least one woman director…

Abstract

Purpose

The study examines the impact of a recent mandate (Section 149 of the Indian Companies Act, 2013, where firms of a certain size are mandated to appoint at least one woman director on the board) on the earnings quality of firms. The study also examines the role of financial expertise and the presence of a woman director in the audit committee on the association between mandate and earnings quality.

Design/methodology/approach

Taking leverage of a quasi-natural experiment in India, the authors employ the ‘Difference-in-Difference’ (DiD) technique. DiD enables the author to filter out the impact of concurrent exogenous shocks while examining the issue. The propensity score matching and entropy balancing techniques have been employed to overcome the problem of endogeneity and self-selection bias.

Findings

Based on the sample of 538 Bombay Stock Exchange (BSE) listed firms, the author finds that magnitude of discretionary accruals has decreased among test firms (firms mandated to comply with Section 149) relative to benchmark marks (firms not mandated to comply with Section 149) during the post-legislation period, indicating the improved earning quality after the mandate. This finding is consistent with the notion of social role theory that women are less likely to be engaged in risky activities such as earnings management. Further, the author find that the financial expertise of the woman and presence of the woman on the audit committee strengthen the positive impact of the mandate on earnings quality. These results are robust to alternative measurements of discretionary accruals.

Originality/value

The study is among the pioneering attempts to make use of a quasi-natural experiment and investigate the impact of a woman director on earnings quality. The study is also one of the few studies to focus on a developing country like India having a culture dominated by men.

Details

Asian Review of Accounting, vol. 32 no. 1
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 10 February 2022

Manish Bansal

This study is to examine the economic consequences of International Financial Reporting Standards (IFRS) converged standards by exploring its phased manner implementation in India.

Abstract

Purpose

This study is to examine the economic consequences of International Financial Reporting Standards (IFRS) converged standards by exploring its phased manner implementation in India.

Design/methodology/approach

The study measures the economic outcomes in the form of capital market reactions such as cost of equity capital, cost of debt capital, information asymmetry and market liquidity. Difference-in-difference (DiD) methodology has been used to analyze the data for this study.

Findings

Based on a sample of 2,685 Bombay Stock Exchange (BSE) listed firms, results show that the Indian capital market reacts negatively to the adoption of IFRS-converged standards. In particular, results show that the cost of equity capital, cost of debt capital and information asymmetry have been increased and market liquidity has been decreased for test firms relative to benchmark firms immediately after IFRS convergence and this negative effect is more pronounced among small firms than large firms. Subsequent tests suggest that test firms have better capital market reactions in the later year of implementation relative to benchmark firms that are implementing IFRS for the first time. It indicates the learning curve effect of IFRS on the economic outcomes as negative impact ameliorates over time.

Originality/value

The study is among earlier attempts to investigate the impact of IFRS on capital market reactions by exploring the phased manner implementation framework. The study is also among the pioneering attempts to examine the learning curve impact of IFRS on capital market reactions.

Details

Journal of Asia Business Studies, vol. 17 no. 1
Type: Research Article
ISSN: 1558-7894

Keywords

Article
Publication date: 26 October 2021

Manish Bansal

The study aims to examine the impact of the firm life cycle on the misclassification practices of Indian firms. The study also examines the impact of International Financial…

Abstract

Purpose

The study aims to examine the impact of the firm life cycle on the misclassification practices of Indian firms. The study also examines the impact of International Financial Reporting Standards (IFRS) on the misclassification practices of Indian firms.

Design/methodology/approach

The study uses Dickinson (2011) cash flow patterns to classify firm-years under life cycle stages. Two forms of misclassification, namely revenue misclassification and expense misclassification have been examined in this study.

Findings

Based on a sample of 19,268 Bombay Stock Exchange (BSE) firm-years spanning over ten years from March 2010 to March 2019, results show that firms operating at high (low) life cycle stage are more likely to be engaged in revenue (expense) misclassification, implying that firms substitute between the classification shifting tools depending upon ease and needs of each tool. Further, our results demonstrate that the magnitude of expense shifting has been significantly increased among test firms (firms reporting under IFRS) relative to benchmark firms (firms reporting under domestic GAAP) in the post-IFRS adoption period, implying that adoption of IFRS negatively affects the accounting quality of Indian firms.

Research limitations/implications

The study considers only two main forms of misclassification, namely revenue and expense misclassification. However, future research may explore the cash flow misclassification.

Practical implications

The findings suggest that standard-setting authorities make more mandatory disclosure requirements under IFRS to curb the corporate misfeasance of classification shifting.

Originality/value

First, the study is among the earlier attempts to examine the impact of the firm life cycle on misclassification practices. Second, the study explores the unique Indian institutional settings concerning the phased-manner implementation of IFRS and examines its impact on the classification shifting practices of firms.

Details

Journal of Applied Accounting Research, vol. 23 no. 3
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 28 May 2021

Manish Bansal and Ashish Garg

The study aims to investigate the impact of International Financial Reporting Standards (IFRS)-converged standards (Indian Accounting Standards (INAS)) on the accounting quality…

Abstract

Purpose

The study aims to investigate the impact of International Financial Reporting Standards (IFRS)-converged standards (Indian Accounting Standards (INAS)) on the accounting quality of Indian firms. The phased manner approach of implementing INAS provides us a unique setting to investigate the issue in India.

Design/methodology/approach

The study used difference-in-difference (DiD) methodology, where the accounting quality is compared between test firms and benchmark firms during the pre-and post-INAS adoption period. Accounting quality is operationalized through four different constructs, namely, earnings smoothing, discretionary accruals, earnings timeliness and value relevance of earnings.

Findings

The findings deduced from the empirical results demonstrate that accounting quality has been significantly reduced after the adoption of INAS. In particular, results show that the degree of earnings smoothing, and the magnitude of discretionary accruals have been increased among test firms in the post-adoption year. Besides, findings provide evidence that timely recognition of losses and value relevance of earnings has been reduced for test firms relative to benchmark firms after the adoption of INAS.

Practical implications

The results suggest that the mere adoption of high-quality standards does not ensure higher accounting quality in countries with a weaker enforcement mechanism. Hence, stringent enforcement mechanisms are needed to ensure full compliance with accounting standards. This study serves as a case study for other emerging countries that are in the process of IFRS convergence and make them aware of the unintended consequences of IFRS adoption.

Originality/value

Indian authorities implemented INAS in a phased manner that provides a unique setting to use DiD methodology. DiD helps to control the impact of concurrent economic shocks, while examining the impact of the particular regulatory shock. Besides, this is the first attempt to investigate the impact of INAS on the accounting quality of Indian firms.

Details

Accounting Research Journal, vol. 34 no. 6
Type: Research Article
ISSN: 1030-9616

Keywords

Article
Publication date: 14 March 2022

Manish Bansal and Asgar Ali

The study presents the zero investment strategies based on the pricing impact of real earnings management (REM) on stock returns after taking into account the direction and…

Abstract

Purpose

The study presents the zero investment strategies based on the pricing impact of real earnings management (REM) on stock returns after taking into account the direction and endogeneity nature of REM.

Design/methodology/approach

The authors use standard portfolio methodology and Fama–Macbeth cross-sectional regression to analyze the data for this study. Both upward and downward form of REM has been examined. Accrual earnings management (AEM) has been controlled while examining the association between REM and stock returns.

Findings

The findings demonstrate that the REM anomaly exists in the Indian equity market and is consistent under different market conditions and investment horizons. It is robust after controlling for cross-sectional effects and AEM. Our subsequent analysis suggests that a decile-based zero investment portfolio strategy based on REM loadings generates an annual excess return of 17.90%. The presented annual excess return is highest among quantile and mean-based investment strategies. Further, the authors find that REM sorted proposed investment strategies outperform the AEM sorted investment strategies in all spheres.

Practical implications

The findings suggest that investors can form an arbitrage profitable investment strategy by taking a long position in the bottom 10% of negative REM stocks, and a short position in the top 10% of positive REM stocks.

Originality/value

This is the first study that examines the pricing impact of REM on stock returns and provides zero investment strategies by betting against REM.

Details

Asian Review of Accounting, vol. 30 no. 2
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 23 September 2022

Suja Sarah Thomas, Manish Bansal and Ibrahim Elsiddig Ahmed

This study aims at investigating banks’ compliance with the disclosure requirements of Basel III in two emerging market economies, namely, the United Arab Emirates (UAE) and…

Abstract

Purpose

This study aims at investigating banks’ compliance with the disclosure requirements of Basel III in two emerging market economies, namely, the United Arab Emirates (UAE) and India. This study also examines the impact of economic factors on the extent of disclosures.

Design/methodology/approach

The authors compare the Basel disclosure practices between UAE and Indian listed banks and have used panel data regression models to investigate the compliance and level of reporting based on three market variables, namely, size, leverage and profitability of listed banks.

Findings

After examining Basel reporting for each of three categories of independent factors, size was found to be the predominant factor influencing the Basel disclosures, followed by profitability and degree of financial leverage. It is prudent for all the banks irrespective of size to capitalize on themselves with an intent to tide over the frequent economic crises and prevent every economic crisis from becoming a full-blown financial crisis.

Practical implications

The findings suggest that there is an urgent need for a high level of concerted action in the context of listed banks in the selected emerging market nations to direct more resources to ensure full compliance with Basel III. The findings inform practitioners in emerging countries of compliance and plan expanded future applications. Investors should consider the BASEL compliance level of Banks before parking their funds in the bank’s stocks. The banks having a higher degree of compliance are expected to be safer than their counterparts having lower Basel compliance.

Originality/value

Many previous studies have examined the implementation of Basel III in general. This study is specific in assessing the compliance with disclosure requirements as prescribed by Pillar III of the Basel norms. To the best of the authors’ knowledge, this is the first research to compare market discipline in emerging markets. Existing studies have either assessed the level of compliance in one individual or similar types of markets. However, this study made a pioneering attempt to compare two different countries in the same category (emerging markets).

Details

Journal of Financial Regulation and Compliance, vol. 31 no. 3
Type: Research Article
ISSN: 1358-1988

Keywords

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