Managerial discretion in distressed firms

Andreas Charitou, Neophytos Lambertides and Lenos Trigeorgis

The British Accounting Review, 2007, vol. 39, issue 4, 323-346

Abstract: This study examines the earnings management behaviour of 455 distressed US firms that filed for bankruptcy during the period 1986–2001. We examine (a) possible earnings management during the years prior to bankruptcy-filing, (b) whether qualified audit opinions cause conservative earnings management behaviour, (c) whether earnings management differs between firms that discontinued operations and firms that survived thereafter, and (d) the effect of earnings management on subsequent stock returns. Our results are consistent with downwards earnings management 1 year prior to the bankruptcy-filing. Results also show that (a) firms receiving unqualified audit opinions 4 or 5 years prior to the bankruptcy-filing event manage earnings upwards in subsequent years, consistent with Rosner [2003. Earnings manipulation in failing firms. Contemporary Accounting Research 20, 361–408], (b) more conservative earnings management seems to be related to the qualified audit opinions rendered in the preceding year, (c) firms with long-term negative accruals the year of bankruptcy-filing have a greater chance to survive thereafter, and (d) more pronounced (negative) earnings management is associated with more negative (next year's) subsequent returns.

Keywords: Distress; Bankruptcy; Earnings management; Audit opinion; Stock returns (search for similar items in EconPapers)
JEL-codes: G14 G24 G32 M41 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:39:y:2007:i:4:p:323-346

DOI: 10.1016/j.bar.2007.08.003

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