Purpose While prior literature on relative performance evaluation (RPE) has primarily focused on annual metrics, this study investigates whether quarterly relative performance reversals prompt firms to engage in earnings management to enhance reported annual performance. Design/methodology/approach Using panel data on Indian-listed firms from 2010 to 2024, this study employs pooled ordinary least squares (OLS) regressions to examine the association between quarterly relative performance reversals and year-end earnings management, proxied by discretionary accruals measured using the modified Jones model. A series of robustness tests is conducted, addressing existing earnings benchmarks, endogeneity, sample selection, and alternative measures of earnings management and relative performance. Findings The analysis reveals that firms experiencing quarterly relative performance reversals engage in significantly higher income-increasing discretionary accruals, predominantly concentrated in the second half of the fiscal year. These accruals are strategically timed in response to interim disclosures, suggesting that managers seek to close the performance gap with industry peers. Furthermore, such accrual use is associated with a subsequent decline in operating performance, highlighting the longer-term costs of opportunistic earnings management. Originality/value To the best of our knowledge, this is one of the few studies systematically linking quarterly relative performance dynamics to year-end earnings management, emphasizing the need for closer monitoring of interim disclosures as indicators of potential earnings manipulation.
Chinnasamy et al. (Fri,) studied this question.