Title: Do Indian firms manage earnings to avoid losses?

Authors: Rachappa Shette; Sudershan Kuntluru; Ajit Dayanandan

Addresses: Finance, Accounting and Control Area, Indian Institute of Management Kozhikode, Kerala, India ' Finance, Accounting and Control Area, Indian Institute of Management Kozhikode, Kerala, India ' College of Business and Public Policy, University of Alaska Anchorage, Anchorage, Alaska-99577, USA

Abstract: The present study examines whether managers of Indian firms focus on avoiding losses and how they avoid reporting losses, based on 1,725 non-financial firms listed on National Stock Exchange of India from 2001 to 2019. The earnings distribution approach is employed to determine if firms manage earnings to avoid losses. The empirical analysis is performed using various scaling measures and width of class intervals. The study finds profound evidence for the existence of earnings management to avoid losses. The earnings management level is higher in the year subsequent to reporting positive earnings in one or two years. It also finds that the higher level of current assets and current liabilities and cash flow from operations are used as major components to avoid losses. The empirical evidence supports the analytical foundation of cumulative prospect theory. The findings are useful to regulators, investors, and managers in making an effective decision.

Keywords: earnings management; earnings discontinuity; avoid losses; India; cumulative prospect theory; CPT.

DOI: 10.1504/IJCG.2021.121279

International Journal of Corporate Governance, 2021 Vol.12 No.3/4, pp.283 - 303

Received: 11 Jun 2021
Accepted: 22 Sep 2021
Published online: 03 Mar 2022 *

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