Financial distress, internal control, and earnings management: Evidence from China

Abstract

Using a sample of listed firms in China during the period of 2007–2015, this paper investigates how financial distress influences the choice of earnings management methods and how internal control quality moderates the above relation. This paper finds that financially distressed firms tend to undertake more accrual earnings management and less real earnings management. Internal control exerts a moderation effect on the relation between financial distress and earnings management by restraining both accrual and real earnings management. This study provides additional insights into earnings management and internal control in financially distressed firms, particularly from the perspective of an emerging economy.