Financial Sustainability and Corporate Credit Risk: Moderating Role of Earnings Management

Aifang Xin, Muqaddas Khalid, Shoaib Nisar () and Iqra Riaz
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Aifang Xin: School of Business Administration, Shandong University of Finance and Economics, Jinan 250014, China
Muqaddas Khalid: Department of Management Sciences, Lahore Garrison University, Lahore 54000, Pakistan
Shoaib Nisar: Department of Management Sciences, Lahore Garrison University, Lahore 54000, Pakistan
Iqra Riaz: Department of Management Sciences, Lahore Garrison University, Lahore 54000, Pakistan

Sustainability, 2024, vol. 16, issue 13, 1-22

Abstract: Many industries put on a show of sustainability to draw in investors even though they are not financially viable. This study examines how real-earnings management (REM) moderates the relationship between credit risk (CR) and financial sustainability (FS). Real earnings management (REM) uses three techniques to measure earnings management: cash flow, overproduction, and discretionary spending. The distance-to-default approach of the KMV model, as an inverse proxy, is used in the current study to enumerate CR. Panel data of non-financial listed companies from 2013 to 2021 is used in this study. This study used PROCESS macro to construct bootstrap confidence intervals to estimate the model and “simple slope analysis” to visualize the model. The findings demonstrate a significant negative relationship between credit risk and financial sustainability. Real earnings management as a moderator weakens the relationship between financial sustainability and credit risk. This study aids investors in integrating sustainability into their investment process and helps them make wise choices. In addition, the results of this study might assist managers in adjusting cash flow patterns, real earnings management practices, and financial sustainability to reduce credit risk.

Keywords: financial sustainability (FS); credit risk (CR); real earnings management (REM); KMV model; Hayes model (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2024
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