Annual report readability and earnings management of financial distressed firms: the moderating role of ownership concentration in India

The present study investigates the impact of earnings management on the readability of financial disclosures of distressed Indian firms. It uses a sample of 545 management discussion and analysis sections of the annual report of 208 Indian financially distressed publicly traded firms for the period 2017–2021. Using multiple regression models, the study reveals a significant positive association between earnings management and the complexity of disclosures. This association is strongly moderated by the concentrated ownership of firms. Further, the impact of such moderation varies with the level of financial distress. The result is consistent for both accrual-based and real activity-based earnings management. This has significant implications for regulators, investors and analysts of the Indian stock market.