Financial Distress, Earnings Benchmark and Earnings Management Practices

2021 ◽  
pp. 097226292110109
Author(s):  
Karan Gandhi
Keyword(s):  
Panel Data ◽  
Earnings Management ◽  
Financial Distress ◽  
Management Practices ◽  
Real Earnings Management ◽  
Public Companies ◽  
Large Panel ◽  
Distressed Firms ◽  
Contradictory Evidence ◽  
Financially Distressed

Prior research exhibits contradictory evidence on earnings management practices, both accrual and real, undertaken by the firms in state of financial distress. This study uniquely examines the issue in the presence of earnings-increasing earnings management motivation- meeting earnings benchmark of avoiding losses. For examining the issue, this study analyzes large panel data of Indian public companies for the period 2000–2016. The findings indicate prevalence of earnings-decreasing real earnings management practices, that is, decrease in overproduction and increase in spending on discretionary expenses, in financially distressed firms despite there being motivation to increase earnings to avoid losses. No evidence of accrual earnings management practices has been observed in such firms.

scholarly journals Corporate Governance and Earnings Management: The Role of Board of Directors and Audit Committee in Financially Distressed Firms

2020 ◽  
Vol 3 (1) ◽  
pp. 113
Author(s):  
Emita W. Astami ◽  
Rusmin Rusmin
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Board Of Directors ◽  
Financial Distress ◽  
Audit Committee ◽  
Management Practices ◽  
Positive Role ◽  
Cross Sectional ◽  
Distressed Firms ◽  
Financially Distressed

This study investigates the association between corporate governance and earnings management practices of Australian’s financially distressed firms. Based on a sample of 164 firm-year incorporating non-financial firmsexperiencing financial distress, the cross-sectional modified Jones (1991) model is used to measure discretionary accruals (the proxy for earnings management). Board of directors and audit committee characteristic variables are employed as the key predictor variables for measuring the effectiveness of corporate governance. This study finds that the companies are seeking to reduce their reported earnings to increase the likelihood of making a profit in the following year with the goal of avoiding bankruptcy;a larger number of directors on a board is less effective in detecting and constraining the practices of earnings management by managers of distressed firms; an active audit committee plays a positive role in detecting and reducing the probability of earnings management. The findings of this study have implications especially to regulators and corporate governance reformists that determine corporate governance rules. This is primarily in regard to the efforts made by listed companies in maintaining their sustainability through more emphases on the process for monitoring and selection of board of directors and audit committee members to reinforceeffectiveness in managerial performance evaluation.

Do financially distressed firms misclassify core expenses?

2017 ◽  
Vol 30 (2) ◽  
pp. 205-223 ◽  
Author(s):  
Neerav Nagar ◽  
Kaustav Sen
Keyword(s):  
Earnings Management ◽  
Financial Distress ◽  
Real Earnings Management ◽  
Management Tool ◽  
Content Type ◽  
Operating Income ◽  
Special Items ◽  
Classification Shifting ◽  
Distressed Firms ◽  
Financially Distressed

Purpose This paper aims to examine whether financially distressed firms manipulate core or operating income through the misclassification of operating expenses as income-decreasing special items. Design/methodology/approach This sample comprises firms in the USA with data from 1989 to 2010. The authors used the methodology given in McVay (2006) and multiple regressions. Findings Managers of financially distressed firms are more likely to inflate core or operating income as compared to the healthy firms to meet or beat earnings benchmarks. They do so by misclassifying core or operating expenses as income-decreasing special items. Specifically, core expenses are shifted to income-decreasing special items like goodwill impairments, settlement costs, restructuring costs and write downs. Practical implications The paper sheds light on an important firm characteristic, financial distress that intensifies classification shifting – an earnings management tool which auditors, investors and regulators find tough to detect. The findings have implications for investors, as they fail to comprehend such shifting (McVay, 2006); analysts, who issue forecasts based on street earnings; lenders, as distressed firms may be concealing their true performance; and regulators, as the misclassification of income statement items is a violation of accounting principles. Originality/value The authors extend the literature on accruals and real earnings management by the financially troubled firms and present first evidence that the managers of such firms also manipulate core or operating income through classification shifting.

Earnings Management Response to Debt Covenant Violations and Debt Restructuring

2002 ◽  
Vol 17 (4) ◽  
pp. 295-324 ◽  
Author(s):  
Bikki Jaggi ◽  
Picheng Lee
Keyword(s):  
Earnings Management ◽  
Financial Distress ◽  
Discretionary Accruals ◽  
Debt Restructuring ◽  
Distressed Firms ◽  
Debt Covenant ◽  
Financially Distressed ◽  
Covenant Violations

The study investigates whether the choice of income-increasing or income-decreasing discretionary accruals is related to the severity of financial distress and whether this choice is also influenced by the creditors' waivers of debt covenant violations. Financially distressed firms experiencing debt covenant violations and/or debt restructuring during the 1989–96 period are used to evaluate the management's choice of discretionary accruals. Discretionary accruals are calculated based on four different accrual models. The results show that managers of financial distressed firms use income-increasing discretionary accruals if they are able to obtain waivers for debt covenant violations, and use income-decreasing discretionary accruals if debt restructuring takes place or debts are renegotiated because waivers are denied. These findings thus provide support to the expectation that the choice of income-increasing or -decreasing discretionary accruals is influenced by the severity of financial distress. They also provide an explanation for divergence in the results of earlier studies on the use of income-increasing or -decreasing discretionary accruals by financially distressed firms.

scholarly journals When Does Earnings Management Matter? Evidence across the Corporate Life Cycle for Non-Financial Chinese Listed Companies

2020 ◽  
Vol 13 (12) ◽  
pp. 313 ◽  
Author(s):  
Ammar Hussain ◽  
Minhas Akbar ◽  
Muhammad Kaleem Khan ◽  
Ahsan Akbar ◽  
Mirela Panait ◽  
...  
Keyword(s):  
Life Cycle ◽  
Panel Data ◽  
Earnings Management ◽  
Fixed Effects ◽  
Management Practices ◽  
Real Earnings Management ◽  
Earning Management ◽  
Bankruptcy Risk ◽  
Corporate Managers ◽  
Corporate Life Cycle

Information availability, firm performance, idiosyncratic volatility and bankruptcy-risk vary across the Corporate Life Cycle (CLC) stages. The purpose of this paper is to examine whether CLC stages explain firm’s propensity to engage in both accrual base and real earning management practices in the context of China. Panel data of 3250 non-financial Chinese listed firms spanning from 2009 to 2018 is used to investigate the proposed relationship. CLC stages were captured through Dickinson’s model, while earnings management is measured by employing both techniques, i.e., accruals-base earnings management and real earnings management. The data were analyzed through Panel data fixed-effects and random-effects techniques. Results reveal that, when compared to shakeout phase, managers’ response to use both earnings management practices is significantly higher during introduction and decline phases, and lower during growth and mature stages of CLC. It suggests that introductory and later-staged firms distort their factual financial information from creditors to obtain loans without strict debt covenants. Our results are robust to alternate measures and specifications. The core contribution of this research is to add a fresh perspective to the CLC research by uncovering its imperative role in influencing the earning management behavior of corporate managers.

Can Corporate Social Responsibility Decrease the Negative Influence of Financial Distress on Accounting Quality?

2021 ◽  
Vol 13 (19) ◽  
pp. 11124
Author(s):  
Jun Hyeok Choi ◽  
Saerona Kim ◽  
Dong-Hoon Yang ◽  
Kwanghee Cho
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Earnings Management ◽  
Financial Distress ◽  
Negative Influence ◽  
Accounting Quality ◽  
Distressed Firms ◽  
Corporate Social ◽  
The Impact ◽  
Positive Effect

This study aimed to test how corporate social responsibility (CSR) can affect the impact of corporate financial distress on earnings management. Based on the existing literature, distressed firms tend to hide their financial crises through earnings manipulation. However, as CSR can positively affect companies in terms of performance, risk reduction, and market response, the better a firm’s CSR is the less managers will attempt earnings management even if they experience temporary distress. Consistent with the literature, test results using Korean-listed companies show that distress increased earnings management, and we confirmed that CSR weakened the positive effect of distress on earnings management. After testing each of the CSR subcategories, significant results were found mainly on environmental performance, reflecting the globally increasing interest in environmental issues. This study contributes to the literature on distress and earnings management, which rarely considers CSR as a moderating factor.

scholarly journals Political and financial background in board interlocking and earnings management in Brazil

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Cristian Baú Dal Magro ◽  
Roberto Carlos Klann
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Financial Reporting ◽  
Management Practices ◽  
Accounting Information ◽  
Real Earnings Management ◽  
The Political ◽  
Content Type ◽  
Quality Of Accounting Information

Purpose Although board interlocking underlying forces are largely hidden, the purpose of this paper is to provide managers, auditors, analysts, regulators and other stakeholders with sociological board interlocking information considering the different backgrounds of their members. Design/methodology/approach The research sample gathered 1,606 observations from 2010 to 2017. For data analysis, the direct and indirect board interlocking linkages, considering the different backgrounds of board members, established the centrality indicators. Subsequently, the authors used these indicators according to each measured background in the regression models. Findings The results indicate that the political background of board interlocking members is positively related to real earnings management practices, while the financial background has a mitigating effect on such practices. Research limitations/implications The findings suggest that individual skills and interests conveyed across the corporate social network have shaped corporate governance, with distinct impacts on the quality of accounting information. Practical implications The authors conclude that both backgrounds could have implications on agency conflicts, increasing (policy) or reducing (financial) information asymmetry between the company and its various stakeholders, which indicates that the authors must consider sociological and not just economic aspects within corporate governance. Social implications The sociological background of individuals is necessary for the congruence of monitoring mechanisms, and consequently, the quality of accounting information. Originality/value This study examines the influence of the political and financial background of board interlocking members on real earnings management practices in Brazilian publicly traded companies in the International Financial Reporting Standards post-adoption period.

scholarly journals The effect of financial distress and earnings management on tax aggressiveness with corporate governance as the moderating variable

2020 ◽  
Vol 9 (7) ◽  
pp. 167-176
Author(s):  
Ratih Pujirahayu Nugroho ◽  
Sutrisno T Sutrisno ◽  
Endang Mardiati
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Financial Distress ◽  
Stock Exchange ◽  
Real Earnings Management ◽  
Audit Committees ◽  
Manufacturing Companies ◽  
Sample Collection ◽  
Financial Reports ◽  
Tax Aggressiveness

This study aims to verify the correlation between financial distress and earnings management of tax aggressiveness moderated by corporate governance. This study uses a population of manufacturing companies that publish their financial statement on the Indonesia Stock Exchange from 2017 until 2018. Sample collection was performed using a purposive sampling method, resulting in a total of 212 populations that published complete financial reports. This study was tested by using the Multiple Regression Analysis test. This research gave empirical proofs that financial distress and real earnings management positively influenced the tax aggressiveness was supported, the proportion of independent commissioners weakened the financial distress and negatively impacted the tax aggressiveness was supported, the total audit committees weakened the financial distress and negatively influenced the tax aggressiveness was not supported, the proportion of independent commissioners and total audit committees weakened the real earnings management and negatively affected the tax aggressiveness was not supported

scholarly journals IFRS ADOPTION AND EARNINGS MANAGEMENT PRACTICE: EVIDENCE FROM INDONESIA COMPANIES

2019 ◽  
Vol 7 (2) ◽  
pp. 229-239
Author(s):  
Vina Kholisa Dinuka
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Stock Exchange ◽  
Management Practice ◽  
Real Earnings Management ◽  
Manufacturing Companies ◽  
Discretionary Accrual ◽  
Ifrs Adoption ◽  
Negative Effect ◽  
Ifrs Implementation

The purpose of this study is to verify IFRS contribution by examining the presence of Accrual Earnings Management (AEM) and Real Earnings Management (REM) in the period pre- and post- IFRS implementation in manufacturing companies in Indonesia. AEM is measured by absolute value of discretionary accrual, while REM is proxied by three measurements of REM, they are abnormal cash flow operation, abnormal production and abnormal discretionary expenses. The sample is taken from Indonesia stock exchange in 2009-2011 and 2013-2015. 2012 is Indonesia adoption period and it is excluded from the sample, because it is considerated as transitory year. This study uses regression analysis and Paired t-test to compare the presence of AEM and REM preceding and following IFRS implementation. The findings reveal that IFRS adoption has significantly negative effect towards AEM and REM. It indicates that the following IFRS implementation, AEM and REM are decrease. Therefore, IFRS is able to reduce earnings management practices in manufacturing companies in Indonesia both for AEM and REM.

scholarly journals Motive behind Earnings Management Practices: Case in Public Property and Real Estate Companies in Indonesia

2020 ◽  
Vol 12 (1) ◽  
pp. 49
Author(s):  
Alwan Sri Kustono
Keyword(s):  
Real Estate ◽  
Earnings Management ◽  
Hypothesis Testing ◽  
Management Practices ◽  
Financial Statements ◽  
Public Companies ◽  
Public Property ◽  
Real Estate Sector ◽  
Testing Data ◽  
Stage Analysis

This study examines the antecedents and consequence variables of earnings management. This study is expected to explain the motive of earnings management practices by public property and real estate companies in Indonesia: opportunistic or efficient. The theory which is the basis for developing the hypotheses ise agency, positive accounting, and signaling theories simultaneously. This study is explanatory research which aims to explain the causal relationship between variables through hypothesis testing. Data of this research are financial statements of public companies in the property and real estate sector in Indonesia (2014-2018) with some criteria. There are 60 firm-years data used in the analysis. Hypothesis testing uses multiple linear regression two-stage. The first stage analysis is used to examine the effect of the antecedent earnings management variable. Regression second stage test the consequences of earnings management practices. The results show debt and independent commissioners affect earnings management. Management performs more dominant earnings management because of opportunistic interests than to maintain market value and the interests of its     shareholders. The implication of this research is to provide a comprehensive discourse on the motives for earnings management behavior in Indonesia. 

scholarly journals FINANCIAL CONDITION MODERATED THE EFFECTIVENESS OF AUDIT COMMITTEETOREDUCE EARNINGSMANAGEMENT

2015 ◽  
Vol 12 (2) ◽  
Author(s):  
Michella Maria Virgine Prayogo ◽  
Yie Ke Feliana ◽  
Aurelia Carina Christanti Sutanto
Keyword(s):  
Earnings Management ◽  
Financial Distress ◽  
Audit Committee ◽  
Stock Exchange ◽  
Score Test ◽  
Z Score ◽  
Financial Condition ◽  
Activity Frequency ◽  
Distressed Firms ◽  
The Impact

Some cases of financial fraud invite inquiries about the effectiveness of corporategovernance mechanism in financial distress companies. This study empiricallyexamines whether the financial distress moderate the impact of corporate governancemechanism to earnings management. The sample of this study is manufacturingcompanies listed at Indonesia Stock Exchange for period 2010 -2012. Discretionaryaccruals are used as a proxy for earnings management, while financially distressed andnon-distressed firms are identified based on Altman Z-score test. Corporate governancemechanism is measured by four characteristics of the audit committee, i.e. size (totalnumber of audit committee members), independence (audit committee composition),activity(frequency of audit committee meeting), and expertise (the number of auditcommittee have finance or accounting background).This study finds that (1) financialdistress does not moderate the impact of total members of audit committee to earningsmanagement; (2) financial distress does not moderate the impact of frequency of auditcommittee meeting to earnings management; (3) financial distress does not moderatethe impact of audit committee composition to earnings management; (4)financialdistress moderates the impact of audit committee finance/accounting knowledge toearnings management. These results suggestthat the effectiveness corporate governanceis low, and finance/accounting literacy of audit committee should be alert.Beberapa kasus manipulasi keuangan pada perusahaan yang mengalami kesulitankeuangan mengundang pertanyaan terkait efektifitas mekanisme tata kelola perusahaan.Penelitian ini secara empiris menguji apakah kondisi kesulitan keuangan dapatmemoderasi pengaruh mekanisme tata kelola perusahaan terhadap manajemen laba.Sampel dari penelitian ini adalah perusahaan sektor manufaktur yang terdaftar di BursaEfek Indonesia periode 2010-2012.Discretionary accruals digunakan sebagai proksiuntuk manajemen laba, sedangkan kondisi kesulitan keuangan diidentifikasimenggunakan uji Altman Z-score. Mekanisme tata kelola perusahaan diukur dengan 4karakteristik komite audit, yaitu ukuran (jumlah anggota komite audit), independensi(komposisi komite audit), aktivitas (frekuensi pertemuan komite audit), dan keahlian(jumlah anggota komite audit yang memiliki latar belakang keuangan atau akuntansi).Penelitian ini menemukan bahwa (1) kondisi kesulitan keuangan tidak memoderasipengaruh jumlah anggota komite audit terhadap manajemen laba; (2) kondisi kesulitankeuangan tidak memoderasi pengaruh frekuensi pertemuan komite audit terhadapmanajemen laba; (3) kondisi kesulitan keuangan tidak memoderasi pengaruh komposisikomite audit terhadap manajemen laba; (4) kondisi kesulitan keuangan memoderasi pengaruh jumlah anggota komite audit yang memiliki latar belakang keuangan atauakuntansi terhadap manajemen laba. Hasil ini menunjukkan bahwa efektifitas tatakelola perusahaan masih rendah dan anggota komite audit yang memiliki latar belakangkeuangan atau akuntansi harus mewaspadainya.

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