Does good corporate governance constrain cash flow manipulation? Evidence from India
Abstract
Purpose
The purpose of this paper is to examine whether firm-level corporate governance measures and regulatory reforms constrain manipulation of operating cash flows, an important firm performance indicator.
Design/methodology/approach
The sample comprises firms from an emerging market, India, with data from 2005 to 2011. The authors use the methodology given in the paper by Lee (2012) and multiple regressions.
Findings
The authors find that cash flow manipulation is likely to increase with an increase in the controlling ownership. Furthermore, board diligence and better audit fail to curb such manipulation. However, the authors do find that such manipulation has gone down in the recent years, and diligent boards constrain it, possibly due to the recent steps taken by the Indian Government for improving the corporate governance environment in India.
Practical implications
The findings can act as feedback for the regulators and policy makers. Potential investors and analysts may also benefit from the study, since they can be more vigilant about the firms’ cash flow manipulation practices and can demand better governance.
Originality/value
The findings suggest that good corporate governance makes managers substitute earnings management with cash flow manipulation.
Keywords
Acknowledgements
The authors thank the editor, Don Johnson, two anonymous reviewers and Conference participants at the 2016 JCAE Annual Symposium and the 2015 IFABS Corporate Finance Conference.
Citation
Nagar, N. and Raithatha, M. (2016), "Does good corporate governance constrain cash flow manipulation? Evidence from India", Managerial Finance, Vol. 42 No. 11, pp. 1034-1053. https://doi.org/10.1108/MF-01-2016-0028
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited