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.
Highlights
Managers of the companies have different incentives to manipulate earnings
During a financial crisis, the pressure brought by poor results or tough financial situations is an ideal context for managers to expand the alteration of the current performance of firms
Based on the provided literature review, we analysed studies devoted to the issue of earnings management and its impact on bankruptcy prediction models
Summary
Managers of the companies have different incentives to manipulate earnings. These manipulations may affect the quality of financial statements and alter their reliability. During a financial crisis, the pressure brought by poor results or tough financial situations is an ideal context for managers to expand the alteration of the current performance of firms. Bankrupt companies manipulate earnings upwards in comparison with healthy firms, managers have stronger motivations for manipulating reported earnings during financial distress situations, such as the period preceding bankruptcy procedures and, in some cases, companies manipulate earnings to hide negative signals of financial distress (Campa and Camacho-Minano, 2015). When earnings management complicates investors rational calculation, the devastating effect is undisputable since it can degrade the quality of information related to profits presented in the financial statements
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