Earnings management in politically connected firms in India

Abstract

This paper attempts to provide a brief introduction on the business ecosystem in India and the regulation governing the businesses in India and its rationale. We have also touched upon briefly on the several sectors and the regulatory bodies governing the corresponding sectors. On the backdrop, issues like corruption and bribery are also discussed briefly. This paper attempts to contrast the earnings management practices due to the established political connections. The main focus of this paper is to understand if there is any difference in practices of the Earnings management in highly politically connected and non-connected BSE 500 firms across industries. In our analysis, we have identified year 2011-2012 to be the event year due to various public revelations of the political connections of several firms. In the current context of several rule and regulations governing the business, corporates have enough incentives to develop political connection with the expectations that this would help them perform better. At times, such political linkages can also be seen as deterrent by the investors as was indicated by one study by equity analyst firm.