Fixing the Core, Earnings Management, and Sustainable Emergence From Financial Distress: Evidence From China’s Special Treatment System

Abstract

Throughout their business life cycle, firms may experience financial distress. Successful emergence from such distress is important to their multiple stakeholders. Using a sample of publicly listed firms in China that emerged from Special Treatment (an indicator of delisting risk), we focus on the key actions such firms take prior to emergence, namely, fixing the core of the business and earnings management. We examine how these actions are associated with sustainable emergence, which we define as emergence from Special Treatment without reentry in the next 5 years. Consistent with the expectation that shortcut fixes to problems do not yield a long-term solution, we find that repairing the core of the business by improving operating efficiency is positively associated with sustainable emergence, whereas earnings management is negatively associated with it. We also find that the positive (negative) association between fixing the core (earnings management) and sustainable emergence is pronounced only for state-owned enterprises. Our article adds to the limited literature that examines issues related to distressed firms’ sustainable turnaround.

Textual Emotional Tone and Financial Crisis Identification in Chinese Companies: A Multi-Source Data Analysis Based on Machine Learning

“…Another view equated a financial crisis with the situation where the company collapses into bankruptcy, claiming that a company in financial crisis referred to the act of filing a legal bankruptcy petition under the bankruptcy law [2]. From the perspective of defining financial crises empirically, the researchers usually define the listed companies undergoing financial crises as those under special treatment (ST) [3][4][5][6][7]. A stock identified as ST represents that the listed company has an abnormal financial condition, and this abnormality mainly includes one of two cases: one is that the listed company has lost money for two consecutive years, and the other is that the net assets of the listed company are lower than the par value of the stock.…”

“…The core of GBDT is that in each iteration, the latter decision tree is trained using the residuals of the previous decision trees following the negative gradient. The negative gradient residuals can be calculated by Equation (5).…”

Corporate Fraud and Accounting Firm Involvement: Evidence from China

“…Moreover, Chinese listed companies usually have a strong incentive for earnings management given a number of earnings-based regulations (Chen et al 2001;Chen and Yuan 2004;Jing et al 2021). Aharony et al (2000) stated that revenue-related fraud is more consequential than asset-related fraud as income performance is an important criterion for IPO, rights offerings, and maintaining exchange-trading status.…”

أثر العلاقة بین خصائص مجلس الإدارة وجودة الأرباح على خطر التعثر المالى للشركات: أدلة عملیة من بیئة الأعمال المصریة

“…. ‫اسات‬ ‫در‬ ‫نتائج‬ ‫مع‬ ‫ويتفق‬ ‫الثالث،‬ ‫الفرض‬ ‫يؤيد‬ ‫ما‬ (Sayidah et al, 2020;Jing et al, 2021;Pratiwi et al, 2022…”