Earning management, agency cost and value: Non-rent seeking and rent seeking prone firms - Indian evidence

Abstract

The study explores and contrasts the earning management and its nature of the non-rent seeking and rent seeking prone firms followed by their respective valuation implication in the light of agency problem (cost) in India, where rent seeking is central to the economy. The empirical results suggest that the cash flow management by the non-rent seeking firms having lesser agency cost, is likely to be beneficial from equity valuation point as the same might aid in addressing information asymmetry as to superior operating cash flow and cash flow growth. Accrual management is considered detrimental from valuation perspective for these firms- may be due to information risk of accruals. For rent seeking prone firms where agency cost is documented to be higher, both cash flow management and cost of production management are opportunistic because they are likely to be aimed at reaping private benefit, as such, both have an inverse relation with the equity value.