This study investigates the impact of the degree of financial distress, proxied by the Altman Z-Score, on the earnings management activities of Italian non-listed firms using a linear regression model which controls for heteroscedasticity and autocorrelation using the Petersen method. The extant literature provides mixed evidence on this relationship for listed firms. In our study we find a positive (negative) relationship between financial distress risk and income-decreasing (income-increasing) earnings management, suggesting that firms tend to manage earnings downward as financial distress risk increases. In two robustness tests, we test the power of the Kothari model and we also analyse a reduced firm sample representing over 80% of the population, though the results are qualitatively the same. Our research has several implications for academics, practitioners, lenders, and national standard setters, showing that, in contrast to the extant literature, non-listed firms are more likely to manage earnings downward as their financial situation deteriorates. Furthermore, our findings are of interest to national standard setters and professional accountants who are concerned with advanced warning indicators of firm financial problems such as Altman’s Z-score, especially in recent years in which countries are focused on developing robust empirical models to detect firm financial difficulties.

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

Gaetano Matonti
;
Aurelio Tommasetti;Carlo Torre;
2020

Abstract

This study investigates the impact of the degree of financial distress, proxied by the Altman Z-Score, on the earnings management activities of Italian non-listed firms using a linear regression model which controls for heteroscedasticity and autocorrelation using the Petersen method. The extant literature provides mixed evidence on this relationship for listed firms. In our study we find a positive (negative) relationship between financial distress risk and income-decreasing (income-increasing) earnings management, suggesting that firms tend to manage earnings downward as financial distress risk increases. In two robustness tests, we test the power of the Kothari model and we also analyse a reduced firm sample representing over 80% of the population, though the results are qualitatively the same. Our research has several implications for academics, practitioners, lenders, and national standard setters, showing that, in contrast to the extant literature, non-listed firms are more likely to manage earnings downward as their financial situation deteriorates. Furthermore, our findings are of interest to national standard setters and professional accountants who are concerned with advanced warning indicators of firm financial problems such as Altman’s Z-score, especially in recent years in which countries are focused on developing robust empirical models to detect firm financial difficulties.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11386/4754192
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