Author(s): Girish Jain and Amarnath Bose
In this paper we study the link between returns and the Beneish-M score, an index modeled on eight financial ratios. Outside India, this index has been shown to indicate whether a company is likely to have manipulated its profits. Our study using ten-year data of NSE500 Indian companies demonstrates that Indian companies with an M-score above the threshold value of -1.78 report lower returns, on an average, in the following year. This lends credence to the hypothesis that the market seems to penalize fiscal manipulation. Though our findings vary from one year to another, this study shows that the Beneish-M classification has a strong association with the rate of returns in the subsequent year, with the flagged companies reporting a lower market return on an average. These findings can provide strong clues to investors to avoid stocks of companies based on a classification using the Beneish M-score.