Publication: Earnings quality in ex-post failed firms
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2011-01-04
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Taylor & Francis
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Abstract
This paper analyses earnings quality in ex-post failed firms. Using a large sample of UK bankrupt firms,
we find that failed firms manage earnings upwards in the four years prior to failure. This manipulation is achieved
in two ways: (1) through accounting (accruals) manipulation; and (2) by implementing real operating actions that
deviate from normal practice. We show that these two types of manipulation lead to reduced earnings reliability.
We use conditional conservatism as a proxy for reliability, as prior literature links conditional accounting conservatism
to better governance and positive economic outcomes. Our results show that conditional conservatism
decreases substantially in the years prior to failure. Finally, we show that accruals manipulation is more pronounced
in ex-post bankrupt firms with low ex-ante probability of failure, and that ex-post bankrupt firms with high ex-ante
failure probability, having likely exhausted the opportunities for accrual manipulation, manipulate real operations
more aggressively
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Keywords
Firm failure, Accruals management, Real earnings management, Conditional conservatism, Earnings quality, Bankruptcy
Bibliographic citation
Accounting and Business Research, 2009, v. 39, n. 2, pp. 119-138