Earnings Management in Group Affiliated Firms: Evidence from India

Rajesh Pathak1*

G-28, Goa Institute of Management, Sanquelim, Goa, 403505

e-mail: rajeshp@gim.ac.in

Ranajee

156/157 IBS-Hyderabad

ICFAI Foundation for Higher Education, Hyderabad, Telengana

e-mail: ranajee@ibsindia.org

Abstract

We investigate if the group affiliated firms engage more in earnings management compared to
the standalone firms and if such engagement outpour during the period of crisis. We use
alternate measures of earnings management (i.e. discretionary accruals, value relevance and
earnings persistence), and employ the Panel and the Fama-Macbeth regressions frameworks,
amid controls for other idiosyncratic factors, for the empirical analysis. We report significant
earnings management across sample firms and highlight that group affiliated firms, on average,
engage in more opportunistic earnings management compared to standalone firms. We further
show that group firms, compared to standalone firms, indulge more in accounting
manipulations during the crisis than that of the steady period. The value relevance is mostly
higher for the standalone firms and during the steady periods, which is consistent with our
hypothesis. Nonetheless, the explanatory power of earnings and book value improve through
time which reveals ameliorating reporting quality of firms, particularly in recent years. Lastly,
we demonstrate poor persistence of earnings reported for business group firms compared to
that of standalone firms which reconfirm our findings. The study contributes greatly to the
business group and earnings management literature since this linkage is yet to receive due
academic attention.
Biography:

Dr Rajesh Pathak is a faculty in the Department of Finance and Accounting at Goa Institute of
Management, Goa and his research interests include market microstructure, functions of
derivatives, and contemporary corporate finance issues.

Dr Ranajee is a faculty in the Department of Finance and Accounting at IBS Hyderabad and
his research interests include momentum trading, behavioural finance, derivatives, and
corporate finance.

1
* Rajesh Pathak is the corresponding author. He is an associate professor at the department of Finance in Goa
Institute of Management, Goa, India.