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Financial distress, earnings management and market pricing of accruals during the global financial crisis

Financial distress, earnings management and market pricing of accruals during the global... Purpose – The aim of this paper is to examine empirically the managerial earnings management practices of financially distressed firms, and to consider whether these practices changed during the recent global financial crisis. Although corporate distress has been a topic of research interest for many years, earnings manipulation by distressed firms has received relatively little attention. Design/methodology/approach – The paper uses three measures of distress, and discretionary accruals, a popular proxy for earnings management, to investigate the impact of distress on earnings management. Findings – The paper finds that managers of distressed firms engage more in income‐decreasing earnings management practices compared to their healthy firm counterparts. The paper also finds some evidence of the effect of the global financial crisis on the association between financial distress and earnings management. Finally, the paper shows some evidence of positive market pricing of discretionary accruals in the non‐crisis period, but a substantial reduction in pricing coefficients during the global financial crisis period. Practical implications – Financial distress experienced by firms provides incentives to managers for earnings manipulation. However, the direction of the earnings management could be income‐increasing or income‐decreasing. The findings from this study will allow investors to make better investment decisions for firms that are experiencing financial difficulties. Originality/value – This paper is the first in New Zealand to investigate the association between firm distress and managerial earnings management decisions. Recently, New Zealand experienced a spate of finance company collapses that somewhat contributes, indirectly, to financial distress experienced by firms. The New Zealand reporting environment is characterized by concentrated ownership, relaxed monitoring by regulatory authorities, and a very low litigation threat that provides an interesting setting to examine the research question. This paper is also the first to test the market pricing of earnings components in New Zealand. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Financial distress, earnings management and market pricing of accruals during the global financial crisis

Managerial Finance , Volume 39 (2): 26 – Jan 11, 2013

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References (76)

Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074351311294007
Publisher site
See Article on Publisher Site

Abstract

Purpose – The aim of this paper is to examine empirically the managerial earnings management practices of financially distressed firms, and to consider whether these practices changed during the recent global financial crisis. Although corporate distress has been a topic of research interest for many years, earnings manipulation by distressed firms has received relatively little attention. Design/methodology/approach – The paper uses three measures of distress, and discretionary accruals, a popular proxy for earnings management, to investigate the impact of distress on earnings management. Findings – The paper finds that managers of distressed firms engage more in income‐decreasing earnings management practices compared to their healthy firm counterparts. The paper also finds some evidence of the effect of the global financial crisis on the association between financial distress and earnings management. Finally, the paper shows some evidence of positive market pricing of discretionary accruals in the non‐crisis period, but a substantial reduction in pricing coefficients during the global financial crisis period. Practical implications – Financial distress experienced by firms provides incentives to managers for earnings manipulation. However, the direction of the earnings management could be income‐increasing or income‐decreasing. The findings from this study will allow investors to make better investment decisions for firms that are experiencing financial difficulties. Originality/value – This paper is the first in New Zealand to investigate the association between firm distress and managerial earnings management decisions. Recently, New Zealand experienced a spate of finance company collapses that somewhat contributes, indirectly, to financial distress experienced by firms. The New Zealand reporting environment is characterized by concentrated ownership, relaxed monitoring by regulatory authorities, and a very low litigation threat that provides an interesting setting to examine the research question. This paper is also the first to test the market pricing of earnings components in New Zealand.

Journal

Managerial FinanceEmerald Publishing

Published: Jan 11, 2013

Keywords: Financial distress; Earnings management; Global financial crisis; New Zealand; Financial management

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