Impact of earnings management on bankruptcy prediction

Abstract

Research background: Managers of the companies intentionally manipulate business earnings to achieve the required status of the company. Earnings management is a legal and widely preferred phenomenon of business finance that financial managers use to maintain and improve the company´s competitiveness. The consequence of these activities is to provide a positive view for the owners, encourage the profitability for the creditor and the investors as well as demonstrate economic strengths to competitors. Consequently, these activities lead to the modification of financial statements of the companies, which have a direct impact on the prediction ability of bankruptcy models. Purpose of the article: The main goal of the paper is to point out the impact of earnings management in the companies on the possibility and ability of bankruptcy prediction. There is a correlation between application of earnings management in companies followed by changes in financial statements of the companies. Therefore, the ability of bankruptcy prediction models to predict possible financial problems of the company is questionable. Methods: The paper presents the connection of earnings management and its impact on bankruptcy prediction based on the bibliometric overview and deep literature review. Findings & Value added: The paper presents results, connections and impact of earnings management on bankruptcy prediction.

Keywords

• earnings management;
• bankruptcy prediction;
• financial health;
• prediction models