Do accrual models effectively detect earnings management? A study in the Indian context

Do accrual models effectively detect earnings management? A study in the Indian context

Nimisha Bora

Xavier Institute of Management

Xavier University, Bhubaneswar

Abstract

Earnings management practices have been a concern for academicians and practitioners for decades now. It occurs when discretion is applied over accounting choices or real economic decisions. Most of the studies in this area concentrate around accrual manipulation. Several models have been developed to measure accruals, the Jones model being the first econometric approach to measure accruals. Over the years, the Jones model has consistently outperformed all other models in detecting earnings management. However, in recent times, this model has been critically examined in different economic settings and found to suffer from limitation such as model misspecification, omitted variables and so on. This paper makes an attempt to critically examine few of the most widely used earnings management models in the Indian context and determine the effectiveness of these models. Jones Model, Modified Jones Model, Kothari Model and Yoon Model are examined in this study.

Keywords: Earnings management, accrual earnings management, Jones Model, Modified Jones Model, Kothari Model, Yoon model.