How do Indian Firms Cope with a Crisis? - Earnings Management Characteristics of CNX Nifty 100 Companies

Abstract

An analysis of Indian CNX Nifty 100 companies uncovers the perils of opportunistic earnings management as crises affect balance sheets in FY2007 and FY2012, recession years around the Global Financial crisis. Only a small portion of the companies engage in sophisticated earnings management commensurate with performance.

Operating accruals of the firm are synonymous with its Working Capital investment. These accruals measure Working Capital dependencies in financing growth and should instantiate on PPE investments. The Modified Jones model is measured for the sample of CNX 100 companies including Banks and a DID approach used to compare data before and after a crisis year.

Indian firms show only a 2% level of accruals, but more than 30% firm years show significantly higher accruals in growth years. The study proves indications of Performance measurement hypothesis yet primarily only Opportunistic accruals with negative correlation between Post crisis and pre-crisis accruals and accruals increasing in the post crisis year. Accruals are significantly incident on sales in the pre-crisis years.

The presence of negative accruals may show effects of high growth and slack corporate governance. Banking firms respond with a more sophisticated earnings management strategy. Discretionary Loan Loss provisions significantly increase with increase in Cash profits. These Operating accruals of the firm are synonymous with its Working Capital investment.