The Covid-19 outbreak, corporate financial distress and earnings management

Abdullah A. Aljughaiman, Tam Huy Nguyen, Vu Quang Trinh and Anqi Du

International Review of Financial Analysis, 2023, vol. 88, issue C

Abstract: This study explores the association between the Covid-19 outbreak, corporate financial distress and earnings management practices in China. We investigate whether firms took advantage of the downturn in economic conditions during the pandemic to adjust their earnings using different earnings management techniques. Utilising a sample of 1832 listed firms and underlying theoretical frameworks (i.e., positive accounting and signalling theory), we find that firms were more inclined to manage earnings during the pandemic period. They favoured using the accrual-based rather than the real activity-based earnings management technique. We also find that firms engaged more in income-increasing practices in the shadow of the outbreak. In addition, our results further demonstrate that financially distressed firms were involved in earnings management, particularly accrual-based earnings management. However, compared to privately-owned firms, state-owned enterprises seem to be involved less in earnings management during the Covid-19 pandemic. Findings from this study raise some concerns for policymakers about the credibility of financial reporting information during Covid-19.

Keywords: Earnings management; Covid-19 pandemic; Financial distress; China (search for similar items in EconPapers)
JEL-codes: G01 G30 H12 M41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:88:y:2023:i:c:s1057521923001916

DOI: 10.1016/j.irfa.2023.102675

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