Earnings Management Strategies During Financial Distress: Evidence on Incentives and Trade-Off Between Accrual and Real Earnings Management

P. S. Muhammed Suhail () and Arun Kumar Gopalaswamy ()
Additional contact information
P. S. Muhammed Suhail: Indian Institute of Technology Madras, Tamil Nadu
Arun Kumar Gopalaswamy: Indian Institute of Technology Madras, Tamil Nadu

Chapter Chapter 14 in Financial Markets and Corporate Finance, 2024, pp 265-288 from Springer

Abstract: Abstract The surge in insolvency filings in India has garnered significant scholarly interest due to the substantial cost associated with financial distress. Firms facing financial downturns have strong incentives to manipulate financial reporting through various earnings management strategies. This study aims to assess the extent of earnings management in financially distressed companies, identify incentives for such practices, and explore the trade-off between accrual and real earnings management. Using the data from NSE-listed firms and those undergoing insolvency from 2008 to 2022, the findings indicate a prevalence of real earnings management over accrual earnings management among distressed firms, with overproduction and sales manipulations being favored over cutting discretionary expenses. Further, the study also underscores that the choice between accrual and real earnings management is influenced by the relative cost of each strategy. The findings offer valuable insights for regulators and auditors, shedding light on the earnings manipulation strategies employed by distressed firms and contributing to enhanced financial reporting quality.

Keywords: Financial distress; Bankruptcy; Insolvency; Earnings management; Accrual earnings management; Real earnings management (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:spr:prbchp:978-981-97-6242-2_14

Ordering information: This item can be ordered from
http://www.springer.com/9789819762422

DOI: 10.1007/978-981-97-6242-2_14

Access Statistics for this chapter

More chapters in Springer Proceedings in Business and Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().