Role of Creditors in Monitoring Earnings Quality: A Study on Indian Firms
Published: 2023
Author(s) Name: Mamatanjali Parida, Dushyant A. Mahadik |
Author(s) Affiliation: Research Scholar, School of Management, National Institute of Technology Rourkela, Odisha, India.
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Abstract
In this study, we examine how debt financing in general and bank borrowings in particular affect the earnings quality (EQ) at Indian firms. We conducted an empirical analysis, taking a sample of 626 Indian non-financial firms from 2003 to 2021. Our sample comes from the food and agro-based industry, which is divided into four relatively homogenous groups. On each of the groups, we apply an industry-wise cross-sectional version of the modified Jones model (Dechow et al., 1995) for estimating discretionary accruals (DACC), a measure of EQ. Testing the hypotheses using industry fixed effects for four sub-sectors, we found that bank financing is negatively associated with DACC (positively associated with EQ), whereas non-bank loans affect positively. We interpret this as a sign of discretion applied by opportunistic managers of borrowing firms to showcase a good financial position for reducing the cost of covenant violation. Further, the age, size and performance of the firms are positively related to EQ, while growth opportunity has a negative impact, as expected. The study is helpful for lenders and stakeholders to make policies and minimise their exposure to credit risk.
Keywords: Earnings Quality, Discretionary Accrual, Debt Financing, Debt Covenant, Agency Theory
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