Financial Distress and Accrual Anomaly: Evidence from the Vietnamese Stock Market

Abstract

We examine three widely debated topics in accounting and finance: financial distress, accounting choices and accrual anomaly. We find that the differential persistence of accruals and cash flows is significantly larger for firms with lower financial distress risk. Accordingly, accrual anomaly is economically and statistically positive for firms with low financial distress risk, but insignificant for those with high financial distress risk. We also find that firms with high financial distress risk practice more conservative accounting than those with low financial distress risk. These findings suggest that creditors’ monitoring prevents managers of distressed firms from aggressive accounting choices.