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SEBI releases Development Research Group study titled, Earnings Management in India

The Securities and Exchange Board of India released today the Development Research Group (DRG) Study titled, Earnings Management in India. The study is co-authored by Prof. D. Ajit, Dr. Sarat Malik and Shri Vimal Kumar Verma.

About the Study

Earnings Management (EM) by companies is widespread throughout the world. The motivation to meet earnings targets of the market and thereby derive private benefits is the driving force for EM world-wide. Managers get a number of financial incentives to meet performance expectations and derive private gains in the form of gaining earnings-based bonuses, increased promotion prospects, avoiding termination, avoiding a decline in the value of their stocks etc. Regulators (viz., Securities market regulators) across the world are concerned about the quality of financial reporting, maintaining an efficient capital market, ensuring investor protection, and promotion of financial stability.

The present study examines and quantifies the extent of EM in India by studying a cohort of 2229 listed Indian companies (non-financial) during 2008-2011.  It shows that the average earnings management in corporate sector (non-financial) in India is 2.9 per cent of the total assets of these firms, compared to the estimates in US, Europe and elsewhere in the world (around 1 to 5 per cent of total assets). The study reveals that small firms in India indulge relatively more in earnings management (10.6 per cent of the total asset) than the medium and large size firms.

The study recommends enhanced surveillance, monitoring and regulatory action by the securities market regulator for a company or industry, which is indulged in high level of earnings management (above the average threshold of the industry). It also highlights the need for better and timely disclosure of accounting information and monitoring by auditors/regulators, especially of the items in which management discretion is exercised widely.

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