Investigating the earnings quality characteristic and earnings management type in bankrupt and distressed companies (case study: companies listed on Tehran Stock Exchange)

Author Name(s): Masoud Rahbar Tbalvandani, *Reza Aghajan Nashtaei
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Abstract

This study was conducted to investigate the earnings management type and earnings quality status in bankrupt and distressed companies to compare the results with healthy companies.  The method of study is applied in terms of objective and correlational in terms of nature. In this regard, all manufacturing companies listed in Tehran stock exchange were considered as population of study, which 114 of them were selected as sample of study using screening method from 2011 to 2014. Required data were collected through referring to stock exchange information, Kedal site information and using NovinRahavard and Tadbir software, and they were analyzed using E-Views software. Thus, to obtain the quality of accruals for both bankrupt and distressed companies and healthy companies, standard deviation of estimated wastes was calculated based on the first model.  Finally, after estimating the quality of accruals and variables of accounting at the company level, the hypothesis of study was tested using the model (2) for each of the bankrupt and distressed, and healthy companies. The results showed that discretionary accruals, non-discretionary accruals, portfolio rank, and accruals quality have a significant relationship with future earnings in healthy companies, while operating cash flow does not have a significant relationship with future earnings. In bankrupt and distressed companies, the findings suggest a significant correlation only between portfolio rank and future earnings, while the relationship of other variables with dependent variable was not significant.  In addition, regarding type of earnings management and considering the coefficient of discretionary accruals that was positive (2.09 E-7) in healthy companies and non-significant in bankrupt and distressed companies, it could be stated that earnings management type in both groups was opportunistic.   Value for healthy companies was obtained 0.41. It means that over 40% of changes in future earnings of healthy group companies can be justified by independent variables.   Value for bankrupt and distressed companies was obtained 0.66. It means that 66% of changes in future earnings of healthy group

Companies can be justified by independent variables.

Introduction

Users always require accurate and reliable information for making decision and performing their analyses in their economic affairs, and naturally, lack of appropriate and relevant information can disturb their decision. The financial figures and reports are considered an important part of the data and information required in this process. Numerous experimental studies have confirmed that earnings are considered as the main source of information and decision makers rely more on earnings than any other criteria (Saghafi and Sadid, 2007). However, it should be noted that earnings, as the most important source of information, might not reflect the actual performance and management of companies, since due to inherent flexibility of accounting standards, the interpretation, and application of accounting methods in many cases subject to judgment of managers (Khoshniat and Esmaeili, 2006). Earnings management is a condition in which the managers of the business units report earnings according to their willingness not according to economic content of business unit activities.

Conclusion

According to descriptive statistics, it was revealed that all variables follow normal distribution. In addition, to investigate the durability of variables, unit root test was used. The results showed that all variables of study, except for non-discretionary accruals, are durable at the zero level. Healthy companies, as expected, had higher quality of earnings, operating cash flow, future earnings, discretionary and non-discretionary accruals compared to bankrupt and distressed companies. Then, to obtain the quality of accruals for both distressed and bankrupt companies and healthy companies, standard deviation of estimate wastes was calculated based on the first model.  Finally, after estimating the accruals quality and accounting variables at the company level, the hypotheses of the study were tested using the model (6) for each of healthy and distressed, and bankrupt groups. The results showed that discretionary accruals, non-discretionary accruals, portfolio rank, and accruals quality have a significant relationship with future earnings, while operating cash flow does not have a significant relationship with future earnings in healthy companies. In distressed and bankrupt companies, the findings suggest a significant correlation between portfolio rank and future earnings and the relationship of other variables with dependent variable is not significant.

 

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