Investigating the predictive power of bankruptcy models based on real and accruals earning management models of corporations accepted in Tehran Stock Exchange
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Published:
Mar 26, 2020
Keywords:
Accuracy of Forecast, Bankruptcy, Real Earnings Management, Accrual profit
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Abstract
One of the major challenges faced by major firms is the risk of financial instability and ultimately financial bankruptcy. Hence, the main objective of this paper is to predict bankruptcy based on real Earning management models and the accrual Earning management of companies admitted to the Tehran Stock Exchange. The research method is descriptive-applied and is a correlation study. The time domain of research was between 1382 and 1395, with a sample of 110 companies (65 bankrupt and 65 non-bankrupt companies) selected from the list of companies admitted to the Tehran Stock Exchange. Logistic regression model was used to test the research hypotheses. In general, the findings of the research hypothesis test show that the predictive power of bankruptcy models based on real profit management models and accruals management of companies accepted in Tehran Stock Exchange is significant. Therefore, it can be stated that the amount of real earning management and accrual earnings management affect the bankruptcy of the investigated companies.
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khodadadi, V., & Ghatebi, M. (2020). Investigating the predictive power of bankruptcy models based on real and accruals earning management models of corporations accepted in Tehran Stock Exchange. JMDMA, 1(4), 128-147. https://doi.org/10.3261212/10.3788381233
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References
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Association of Certified Fraud Examiners (2015). International Fraud Examiners Manual. Washington: Acfe. 1875 P. ISBN 978-1-889277-56-8.
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Beneish, M.D. (1999). The Detection of Earnings Manipulation. Financial Analyst Journal, 55(5), pp. 24-36.
Campa, D. & Camacho-Miñano, M.D.M. (2014). Earnings management among bankrupt non- listed firms: evidence from Spain. Spanish Journal of Finance and Accounting/Revista Espanola de Financiacion y Contabilidad, 43(1), pp. 3-20.
Campa, D., & Camacho-Miñano, M.M. (2015). The impact of SME’s pre-bankruptcy financial distress on earnings management tools, International Review of Financial Analysis, 42, 222-234.
Dechow, P., Kothari, S. P., & Watts, R. L. (1998). The relation between earnings and cash flows. Journal of accounting and Economics, 25(2), 133-168.
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Egbunike, Patrick Amaechi., Igbinovia. Ikponmwosa Michael.,(2018). Threat of Bankruptcy and Earnings Management in Nigerian Listed Banks.ACTA UNIVERSITATIS DANUBIUS (AUDOE), Vol. 14, no. 3, pp. 238-253.
Franceschetti, B.M. & Koschtial, C. (Undated). Do bankrupt companies manipulate earnings more than the non-bankrupt ones? Journal of Finance and Accountancy.
García Lara, J.M.; García Osma, B. & Mora, A. (2005). The effect of earnings management on the asymmetric timeliness of earnings. Journal of Business Finance & Accounting, 32(3‐4), pp. 691-726.
Healy, P.M. & Wahlen, J.M. (1999). A review of the earnings management literature and its implications for standard setting’. Accounting Horizons, 13(4), pp. 365- 383.
Lin, H-W, Lo, H-C, Wu, R-S, (2016). Modeling default prediction with earnings management, Pacific-Basin Finance Journal (2016), doi: 10.1016/j.pacfin.2016.01.005.
Pincus, M., and S. Rajgopal. 2002. The interaction between accrual management and hedging: Evidence from oil and gas firms. The Accounting Review 77 (1), 127–160.
Rahmani, A. & Ramsheh, M. (2014). Trade-off between Accrual-based Earnings Management and Real Activities Manipulation. The Iranian Accounting andAuditing Review, 20(4): 39-60. (in Persian)
Rosner, R.L. (2003). Earnings manipulation in failing firms. Contemporary Accounting Research, 20 (2), pp. 361–408.
Roychowdhury, S. (2006), Earning management through real activities manipulation, Journal of Accounting and Economics, 42, pp. 335-370.
Scarlat, E & Delcea, C (2011). "Complete analysis of bankruptcy syndrome using grey systems theory", Grey systems: theory and application, 1(1), 19-32.
Schipper, K. (1989). Commentary on Earnings Management. Accounting Horizons, 3(4), pp. 91-102.
Scott, William, (2008), "Financial Accounting Theory" , Printice Hall, PP. 402-431.
Veganzones, David and Severin, Eric, (2017). The Impact of Earnings Management on Bankruptcy Prediction Models: An Empirical Research (June 3, 2017). Available at SSRN:https://ssrn.com/abstract=2980144or http://dx.doi.org/10.2139/ssrn.2980144.
Zmijewski, M. E. (1984). Methodological issues related to the estimation of financial distress prediction models. Journal of Accounting Research 24, pP. 59–82.
Boulou, Qassim and Meysam Talebi, (2010), "Criteria and Models of Measuring Profit Quality", Exchange Monthly, Economic Quarterly, Financial, No. 92.
Raei, Reza, Fallahpour, Saeed., (2008). Application of Backup Vector Machine in Predicting Corporate Financial Distress Using Financial Ratios. Accounting and Auditing Reviews, Volume 15, Number 1, 53, 17-34.
Kordestani, Gholamreza, Rashid Tatlie, (2014), Predictive Evaluation of Bankruptcy Models (Comparison of Primary and Modified Models), Audit Knowledge Quarterly, No. 55, pp. 70-70.
Kurdistan, Gholamreza, and Tutli, Rashid. (2014). Identify efficient and opportunistic approaches to earnings management at levels of earnings quality. Journal of Accounting and Auditing Reviews, 3 (21): 312-293.
Kordestani, Gholamreza; Rashid Tatli; Hamid Kowsarifar (2014), "Assessing the Predictive Power of Altman's Modified Model of Newton's Financial Crisis and Corporate Bankruptcy", Journal of Investment Knowledge, No. 9, Iranian Financial Engineering Association.
Altman, E.I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23(4), pp. 589-609.
Altman, E.I. (2000). Predicting financial distress of companies: revisiting the Z score model.5-10.retrieved from www.z score.pdf. on 21/6/2017.
Amoa-Gyarteng, K. (2014). Analyzing a listed firm in Ghana for early warning signs of bankruptcy and financial statement fraud: An empirical investigation of AngloGold Ashanti. European Journal ofBusiness and Management, 6(5).
Association of Certified Fraud Examiners (2015). International Fraud Examiners Manual. Washington: Acfe. 1875 P. ISBN 978-1-889277-56-8.
Beneish, D.M.; Lee, M.C.C. & Nichols, C.D. (2012). Fraud detection and expected returns. Retrieved 14th August, 2017 from http://ssrn.com/abstract=1998387 13.
Beneish, M.D. & Nichols, D.C. (2007). The predictable cost of earnings manipulation. Retrieved from:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1006840 on 21/7/2017.
Beneish, M.D. (1997). Detecting GAAP Violation: Implications for assessing earnings management among firms with extreme financial performance. Journal of Accounting and Public Policy, 16(3), pp.271-309.
Beneish, M.D. (1999). The Detection of Earnings Manipulation. Financial Analyst Journal, 55(5), pp. 24-36.
Campa, D. & Camacho-Miñano, M.D.M. (2014). Earnings management among bankrupt non- listed firms: evidence from Spain. Spanish Journal of Finance and Accounting/Revista Espanola de Financiacion y Contabilidad, 43(1), pp. 3-20.
Campa, D., & Camacho-Miñano, M.M. (2015). The impact of SME’s pre-bankruptcy financial distress on earnings management tools, International Review of Financial Analysis, 42, 222-234.
Dechow, P., Kothari, S. P., & Watts, R. L. (1998). The relation between earnings and cash flows. Journal of accounting and Economics, 25(2), 133-168.
Deloitte (2008). Ten things about bankruptcy and fraud. A review of bankruptcy failings. Retrieved from http:www.deloitte.com/.../us_dfc_tenthingsaboutbankruptcy on 14th April, 2017.
Desai, M., and D. Dharmapala. (2009). Corporate tax avoidance and firm value. Review of Economics and Statistics 91 (3): 537-546.
Egbunike, Patrick Amaechi., Igbinovia. Ikponmwosa Michael.,(2018). Threat of Bankruptcy and Earnings Management in Nigerian Listed Banks.ACTA UNIVERSITATIS DANUBIUS (AUDOE), Vol. 14, no. 3, pp. 238-253.
Franceschetti, B.M. & Koschtial, C. (Undated). Do bankrupt companies manipulate earnings more than the non-bankrupt ones? Journal of Finance and Accountancy.
García Lara, J.M.; García Osma, B. & Mora, A. (2005). The effect of earnings management on the asymmetric timeliness of earnings. Journal of Business Finance & Accounting, 32(3‐4), pp. 691-726.
Healy, P.M. & Wahlen, J.M. (1999). A review of the earnings management literature and its implications for standard setting’. Accounting Horizons, 13(4), pp. 365- 383.
Lin, H-W, Lo, H-C, Wu, R-S, (2016). Modeling default prediction with earnings management, Pacific-Basin Finance Journal (2016), doi: 10.1016/j.pacfin.2016.01.005.
Pincus, M., and S. Rajgopal. 2002. The interaction between accrual management and hedging: Evidence from oil and gas firms. The Accounting Review 77 (1), 127–160.
Rahmani, A. & Ramsheh, M. (2014). Trade-off between Accrual-based Earnings Management and Real Activities Manipulation. The Iranian Accounting andAuditing Review, 20(4): 39-60. (in Persian)
Rosner, R.L. (2003). Earnings manipulation in failing firms. Contemporary Accounting Research, 20 (2), pp. 361–408.
Roychowdhury, S. (2006), Earning management through real activities manipulation, Journal of Accounting and Economics, 42, pp. 335-370.
Scarlat, E & Delcea, C (2011). "Complete analysis of bankruptcy syndrome using grey systems theory", Grey systems: theory and application, 1(1), 19-32.
Schipper, K. (1989). Commentary on Earnings Management. Accounting Horizons, 3(4), pp. 91-102.
Scott, William, (2008), "Financial Accounting Theory" , Printice Hall, PP. 402-431.
Veganzones, David and Severin, Eric, (2017). The Impact of Earnings Management on Bankruptcy Prediction Models: An Empirical Research (June 3, 2017). Available at SSRN:https://ssrn.com/abstract=2980144or http://dx.doi.org/10.2139/ssrn.2980144.
Zmijewski, M. E. (1984). Methodological issues related to the estimation of financial distress prediction models. Journal of Accounting Research 24, pP. 59–82.