Investigate the effect of real earnings management on bankruptcy predication models

Abstract

In recent years, some managers have been smoothing income with real activities and accrual items in companies. They have been effecting on reported profits by utilization of earnings management instruments. Financial distress and bankruptcy are significant issues in the economics and accounting literature. Bankruptcy is happened when the firms cannot settle their debts, and bankruptcy prediction models try to prevent it. This study shows the effect of real earnings management on bankruptcy prediction models. Therefore, abnormal production costs, abnormal discretionary expenses and abnormal operational cash flow are considered as a real earnings management methods. Also modified Altman model is used as criteria for bankruptcy of the firms. The sample of this study is consisted of 202 listed firms in Tehran Stock Exchange during 2009-2016. The hypothesis of this study has been examined by Multivariate Regression Model. The results showed that there is a significant relation between abnormal production costs and abnormal operational cash flows with bankruptcy prediction modelexcess stock returns.

Keywords

• real earnings management
• bankruptcy prediction model
• abnormal production costs
• abnormal optional disbursement
• abnormal operational cash flow
• modified altman model