Earnings Management, Earnings Surprises, and Distressed Firms

John S. Howe and Reza Houston

Accounting and Finance Research, 2016, vol. 5, issue 1, 64

Abstract: We examine the propensity of distressed firms to manage earnings and the impact of their earnings management on investor response to earnings. We find that distressed firms manage earnings upward and downward more than other firms. Distressed firms manage earnings upward significantly more than non-distressed firms after negative earnings surprises. Investor response to earnings surprises is smaller in magnitude for distressed firms. Investor response to positive earnings surprises of distressed firms is larger in magnitude than the response to negative earnings surprises. The change in bankruptcy probability after a negative earnings surprise is greater for distressed firms. Distressed firms have less post-announcement earnings drift. The results suggest that earnings management by distressed firms lowers earnings quality and weakens investor response. Our evidence has implications for investors, analysts, and compensation and audit committees.

Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.sciedupress.com/journal/index.php/afr/article/download/8510/5395 (application/pdf)
https://www.sciedupress.com/journal/index.php/afr/article/view/8510 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:jfr:afr111:v:5:y:2016:i:1:p:64

Access Statistics for this article

More articles in Accounting and Finance Research from Sciedu Press Contact information at EDIRC.
Bibliographic data for series maintained by Sciedu Press ().