Earnings management: the influence of peer group and the corporate governance intervention

Abstract

Purpose

Our study investigates the influence of peer performance on the earnings management decisions within publicly traded Indian companies. There is mixed evidence in the literature, with the impact of peer performance on earnings management in emerging markets being notably underexplored. Additionally, the study explores whether robust corporate governance mechanisms can mitigate earnings management practices. Our study offers policy insights into these areas.

Design/methodology/approach

Our study used a longitudinal panel dataset from 2011 to 2020, utilising idiosyncratic returns of peer firms as an external measure of peer performance. This approach is further enhanced by the usage of alternative discretionary accrual metrics, which could be a robust measure for both market leaders and followers.

Findings

Our study employs two distinct methods, accrual and real earnings management, to assess earnings management. The findings indicate that peer performance triggers earnings management within peer groups, showcasing managerial opportunism in financial reporting to align with peer achievements. Furthermore, the evidence suggests that robust corporate governance effectively curtails earnings management, especially in industries where peer influence is significant.

Practical implications

Our study offers valuable insights for regulators, highlighting that enhancing the institutional framework with stringent corporate governance mechanisms can effectively reduce earnings management in companies within emerging markets.

Originality/value

The paper is a novel attempt in emerging markets to show that managers engage in opportunistic reporting to align with the performance of their peers and that governance strategies effectively mitigate these practices in such markets.

Citation

Banerjee, A.K., Akhtaruzzaman, M. and Chatterjee, S. (2024), "Earnings management: the influence of peer group and the corporate governance intervention", Journal of Accounting Literature, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAL-06-2023-0102