Abstract
The purpose of this study is to find out whether earnings management has impacts on bankruptcy risk based on the data of Wirecard Company. The M-score of Beneish's (1999) model has been used to detect the probability of earnings management. On the other hand, the Z"-Score of Altman's (1968) model has been applied to detect Corporate Failure. Both the models are widely used models in their respective fields. The data from 2002 to 2019 were collected from the annual reports of the Wirecard Company. The result of M-Score indicates that earnings management has a significant impact on the corporate failure (Z-Score) of the company. This finding specifies that a financially distressed firm adopts earnings manipulations. The finding also implies that earnings manipulations harm the financial health of a firm. According to the findings, it can be suggested that to know the financial aspects of a company, both the (Beneish M-model and Altman Z-score model) models could be used concurrently. Beneish M-model is for detecting earnings management and the Altman Z-score model is for determining corporate failure. The novelty of the study is that no study was done on Wirecard Company focusing on the association between earnings management & bankruptcy risk.
Highlights
Before investors' investment decisions or sanctioning loans/credits by bankers/suppliers, it is necessary to know whether a company is financially healthy or prone to bankruptcy risk
The purpose of this study is to find out whether earnings management has impacts on bankruptcy risk based on the data of Wirecard Company
Beneish M-model is for detecting earnings management and the Altman Z-score model is for determining corporate failure
Summary
Before investors' investment decisions or sanctioning loans/credits by bankers/suppliers, it is necessary to know whether a company is financially healthy or prone to bankruptcy risk. Detection of potential bankruptcy is essential to protect the stakeholders from social costs and economic losses (Hassanpour & Ardakani, 2017). Assessing the bankruptcy risk might be difficult if there is a practice of earnings management because it reduces the information quality (Agustia et al, 2020). Since bankruptcy or corporate failure causes numerous adverse effects to the stakeholders, the managers feel https://www.cribfb.com/journal/index.php/ijafr. Vol 8, No 1; 2021 pressure due to possible financial distress. To decrease the possibility of financial crises and to assist investors in avoiding huge losses, it is essential to use the tool of forecasting earnings management (Ranjbar & Amanollahi, 2018)
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