Cash holding and investment efficiency nexus for financially distressed firms: The moderating role of corporate governance

The current research study aims to analyze the impact of cash holding on investment efficiency by moderating the role of corporate governance among financially distressed firms. The data for 14 years (2006-2019) is gathered from 400 companies of two Asian emerging economies (Pakistan and India). The results are obtained by applying a generalized method of moments (GMM), which postulates that corporate governance improves cash holding with investment efficiency in the Indian scenario and decreases in the Pakistani scenario. Concerning financially distressed firms, corporate governance strengthens the relationship of cash holding with investment efficiency in the Pakistani context but showing no moderating role in the Indian scenario. The results are helpful in cash management decisions to minimize the agency issue and to avail investment opportunities.

The Different Impact of Top Executives’ Turnover on Healthy and Restructured Companies

The aim of this paper is to investigate if top executives’ turnover affects the performance of a company and if it differently impacts the performances of a healthy and a restructured company. In order to investigate the impact of the renewal of both members of the board of directors and CEO impacts on company profitability, we performed a quantitative analysis based on a sample of 144 Italian companies using a logit model. The findings show that management changes influence the performance of a company. However, the results show a different impact for healthy and restructured companies. The renewal of the board of directors negatively affects the performances of a healthy company while influences positively the probability of a future increase in performances for restructured companies, suggesting useful implications for scholars and practitioners. This analysis confirms that the renewal of top executives can affect the probability of an increase of company performances, especially for distressed firms, contributing to existing literature which is still limited and focused only on few countries.

Corporate Financial Distress: The Impact of Profitability, Liquidity, Asset Productivity, Activity and Solvency

This study aims to determine the importance of liquidity, profitability, asset productivity, activity, and solvency in cases of corporate financial distress. One hundred and five firms in the extractive industry in the United States were analyzed. Firms must be publicly traded and have filed form 10-K reports with the securities and exchange commission of the United States to be considered for the study’s population. The measure of corporate financial distress is the Altman Z-score. By using the Altman discriminant function, this study identifies the precipitants of corporate financial distress. This is especially important because widespread corporate financial distress could cause global financial system volatility. The indicators were measured in the last two years before the distressed firms declared bankruptcy. The results indicate that liquidity, profitability, asset productivity and solvency have an impact on the financial health of firms and therefore, on financial distress. The study further determines that activity ratio does not have a statistically significant relationship with financial distress.

Analysts’ cash flow forecasts informativeness, financial distress and auditor quality

Purpose The purpose of this study is to examine the sophistication (accuracy, bias, informativeness for changes in accruals) and market pricing of analysts’ cash flow forecasts for Eurozone listed firms and the effects of financial distress and auditor quality. Design/methodology/approach Accuracy/bias is investigated using analysts’ cash flow forecast errors. The naïve extrapolation model is used to examine the forecasts’ informativeness for working capital changes. A total return model is used to examine value-relevance. This study controls for the forecast horizon, using the Altman z-score and a BigN/industry specialization auditor indicator to proxy for distress and auditor quality, respectively. Findings Analysts efficiently adjust earnings forecasts for depreciation during cash flow forecast formation but fail to efficiently incorporate working capital changes. Findings indicate cash flow forecasts’ accuracy improves for distressed firms and firms of high auditor quality, attributed to analyst conservatism and accounting choices and more accurate earnings forecasts, respectively. Cash flow forecasts’ value-relevance increases for distressed firms, particularly those of high auditor quality and timely forecasts. Originality/value To the best of the authors’ knowledge, this study is the first to examine analysts’ cash flow forecasts taking into consideration financial distress and auditor quality, controlling for the analyst forecast horizon.

Fixing the Core, Earnings Management, and Sustainable Emergence From Financial Distress: Evidence From China’s Special Treatment System

Throughout their business life cycle, firms may experience financial distress. Successful emergence from such distress is important to their multiple stakeholders. Using a sample of publicly listed firms in China that emerged from Special Treatment (an indicator of delisting risk), we focus on the key actions such firms take prior to emergence, namely, fixing the core of the business and earnings management. We examine how these actions are associated with sustainable emergence, which we define as emergence from Special Treatment without reentry in the next 5 years. Consistent with the expectation that shortcut fixes to problems do not yield a long-term solution, we find that repairing the core of the business by improving operating efficiency is positively associated with sustainable emergence, whereas earnings management is negatively associated with it. We also find that the positive (negative) association between fixing the core (earnings management) and sustainable emergence is pronounced only for state-owned enterprises. Our article adds to the limited literature that examines issues related to distressed firms’ sustainable turnaround.

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

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.

Financial Distress, the Severity of Financial Distress and Direction of Earnings Management: Evidences from Indian Economy

This paper investigates the relationship between earnings management and financial distress and considers whether this relationship varies based on the severity of financial distress and signs of discretionary accruals (a proxy for earnings management). For this purpose, multiple regression analysis has been employed on a sample of 192 financially distressed Indian firms during the period 2011–2018, counting to 1,272 firm-year observations. Discretionary accruals are estimated by the Modified Jones model and Raman and Shahrur (2008) model, while Altman’s Z-score and distance-to-default model are used to detect the degree of financial distress. The findings disclose that the low distressed firms are indulged in higher earnings management than high distressed firms. Also, the low distressed firms are engaged more in income-decreasing earnings management. However, the results are not consistent across both earnings management and distress measures. The findings have significant implications for investors and creditors. They need to be aware of this fact while evaluating creditworthiness of a firm since firms with even a low degree of financial distress can indulge in earnings management to camouflage their true financial condition.