Does promoters’ share-pledging deteriorate the quality of reported earnings? Evidence from the Indian market

Abstract

Purpose – In emerging markets, where ownership is often highly concentrated, the practice of promoters’ sharepledging is prevalent. Such practices have raised concerns among investors and regulators alike, since the board’s high promoter dominance compels managers to manipulate financial reports. Thus, this study aims to investigate the impact of promoters’ share-pledging on two critical aspects of earnings quality: earnings persistence (EP) and informativeness. Design/methodology/approach – In emerging markets, where ownership is often highly concentrated, the practice of promoters’ share-pledging is prevalent. Such practices have raised concerns among investors and regulators alike, since the board’s high promoter dominance compels managers to manipulate financial reports. Thus, this study aims to investigate the impact of promoters’ share-pledging on two critical aspects of earnings quality: earnings persistence (EP) and informativeness. Findings – Our results demonstrate that adopting an opportunistic financial reporting strategy among sharepledging firms reduces the EP, thereby decreasing the informativeness about future earnings. In addition, the DiD analysis results reveal promoters’ motive to manage earnings through accrual and real earnings management signals to a zero-sum game, which exacerbates the earnings quality. Practical implications – Our results demonstrate that adopting an opportunistic financial reporting strategy among share-pledging firms reduces the EP, thereby decreasing the informativeness about future earnings. In addition, the DiD analysis results reveal promoters’ motive to manage earnings through accrual and real earnings management signals to a zero-sum game, which exacerbates the earnings quality. Originality/value – To the best of the authors’ knowledge, this study stands among the first to provide comprehensive empirical evidence on the relationship between promoters’ share-pledging and EP in the Indian market. We offer novel insights by exploiting the 2019 regulatory change, which mandated detailed disclosure of share-pledging fund usage, thereby illuminating the governance implications of this key corporate practice.