Articlebronze2015

Earnings Management, Earnings Surprises, and Distressed Firms

17 citations0/0 files storedAccounting and Finance Research

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Auditing, Earnings Management, Governance Financial Distress and Bankruptcy Prediction Corporate Governance and Financial Management

Abstract

We examine the propensity of distressed firms to manage earnings and the impact of their earnings management on investor response to earnings. We find that distressed firms manage earnings upward and downward more than other firms. Distressed firms manage earnings upward significantly more than non-distressed firms after negative earnings surprises. Investor response to earnings surprises is smaller in magnitude for distressed firms. Investor response to positive earnings surprises of distressed firms is larger in magnitude than the response to negative earnings surprises. The change in bankruptcy probability after a negative earnings surprise is greater for distressed firms. Distressed firms have less post-announcement earnings drift. The results suggest that earnings management by distressed firms lowers earnings quality and weakens investor response. Our evidence has implications for investors, analysts, and compensation and audit committees.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1991Earnings Management During Import Relief Investigations 1995Detecting Earnings Management.1980Financial Ratios and the Probabilistic Prediction of Bankruptcy 2003Earnings Management through Real Activities Manipulation 2002Audit committee, board of director characteristics, and earnings management 1997Earnings management to avoid earnings decreases and losses 2012Detecting Earnings Management

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2024Effect of Earnings Management on Earnings Quality and Sustainability: Evidence from Gulf Cooperation Council Distressed and Non-Distressed Companies 2021FINANCIAL DISTRESS AND EARNINGS MANAGEMENT IN INDONESIA: THE ROLE OF INDEPENDENT COMMISSIONERS

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