Abstract
Earnings management has been a topic of concern amongst practitioners and regulators in recent times. It has received considerable attention from academic researchers across the globe. This study aims to explore the linkage between earnings management and financial distress by using a sample of 30 financially distressed textile firms in India during the period 2010- 2019. Modified Jones Model has been used to estimate discretionary accruals, a proxy for earnings management. Altman’s ZScore has been used to detect the level of financial distress. Multiple regression analysis has been used to investigate the association between earnings management and financial distress after considering certain control variables. The findings portray that even financially distressed firms are engaged in income-decreasing earnings management practices. Firms’ profitability, liquidity and growth opportunities are found to have a significant positive impact on earnings management whereas Cash Flow Coverage (CFC) and leverage are found to have a significant negative association with earnings management. These findings may be useful for lenders and investors as they need to be aware that even firms experiencing financial distress might indulge in earnings management activities.
Keywords: Altman’s Z-Score, discretionary accruals (DAC), Earnings management, financial distress, Modified Jones Model
Introduction
The corporate world has substantiated several accounting frauds and financial scandals in the past few decades. The unexpected breakdown of some of the large commercial enterprises has resulted in enormous loss of stakeholders’ wealth, which, in turn, has reduced stakeholders’ trust in the financial information Read Full Article