The effect of financial distress on earnings management and unpredicted net earnings in companies listed on Tehran Stock Exchange

Abstract

Many financial crisis are related to public corporations, which are increasing. Many investors and creditors are having trouble predicting a financial crisis, especially when managing profits. Recent studies identify the factors associated with earnings management to determine the relationship between the factors and manipulated profits. In order to reduce the risk of financial crises and to help investors avoid large losses in the stock market, it is necessary to develop a model for predicting profit management. In addition, for traditional auditing technologies, it is also difficult to limit the time, human resources, costs, and the impact of abnormal behaviors on complex and large financial information. Therefore, developing a prediction model for managing profits for auditors is useful in identifying the degree of manipulation in financial statements. This paper examines the effect of corporate financial distress on unpredicted net earnings and corporate profits on accepted companies in Tehran Stock Exchange over the period 2010-2015. The models used to test the hypotheses of the research are linear regression using panel data. The results show that the coefficients of the financial distress, institutional ownership, annual sales growth, company loss, company size, the company's market share and firm fixed costs are statistically meaningful. In other words, these independent variables influence on unforeseeable profit and earnings management.

The impact of financial difficulties on earnings management strategies: The case of Italian non-listed firms

“…As discussed earlier, the literature identify several proxies for financial distress, including: debt covenant violation (DeFond and Jimbalvo, 1994;Jha, 2013); persistent loss occurrence (DeAngelo et al, 1994); bankruptcy status (Rosner, 2003;Garcia-Lara et al, 2009;Bisogno and De Luca, 2015); Ohlson's O-score default prediction model (Ranjbar and Farsad Amanollahi, 2018); firm free cash flows (Mohammadi and Amini, 2016); the Fich and Slezak (2008) ratio (Campa, 2019); and Altman's Z-Score (Agrawal and Chatterjee, 2015;Nagar and Sen, 2016;Campa, 2019), the latter used widely in the literature.…”

“…Consistent with the extant research examining the determinants of earnings management, Equation 7 includes several control variables (Dechow et al, 1995;Kothari et al, 2005;Jelinek, 2007;Dechow et al, 2010;Mariani et al, 2010;Bisogno, 2012;Habib et al, 2013;Shan et al, 2013;Agrawal and Chatterjee, 2015;Bisogno and De Luca, 2016;Humeedat, 2018;Lazzem and Jilani, 2018;Ranjbar and Farsad Amanollahi, 2018;Campa, 2019) which are likely to impact on earnings management initiatives.…”

Financial Distress and Earnings Management in Indonesia: The Role of Independent Commissioners

“…Previous study prove that financial distressed companies commonly employ earnings management for motives, such as, contractual negotiations and covering financial distress (Bisogno & Luca, 2015;Ranjbar & Amanollahi, 2018). The study concluded that when companies experience financial difficulties, they will carry out earnings management by changing their operating profits.…”

Keputusan Pemilihan Strategi Manajemen Laba Pada Perusahaan Yang Mengalami Financial Distress di Indonesia

“…Proksi yang lebih mudah dihitung adalah debt to equity ratio (DER), namun DER yang tinggi sering kali tidak serta merta terkait dengan keadaan financial distress (Dechow et al 2010). Proksi financial distress yang paling banyak digunakan barangkali adalah Altman's Z-Score, termasuk penelitian-penelitian terbaru seperti Bisogno & De Luca (2015), Humeedat (2018) dan Ranjbar & Amanollahi (2018).…”