African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 4125

Full Length Research Paper

The impact of financial difficulties on earnings management strategies: The case of Italian non-listed firms

Gaetano Matonti
  • Gaetano Matonti
  • Dipartimento di Scienze Aziendali - Management and Innovation Systems, University of Salerno, 132, Giovanni Paolo II Street, 84084 Fisciano (SA), Italy.
  • Google Scholar
Aurelio Tommasetti
  • Aurelio Tommasetti
  • Dipartimento di Scienze Aziendali - Management and Innovation Systems, University of Salerno, 132, Giovanni Paolo II Street, 84084 Fisciano (SA), Italy.
  • Google Scholar
Carlo Torre
  • Carlo Torre
  • Dipartimento di Scienze Aziendali - Management and Innovation Systems, University of Salerno, 132, Giovanni Paolo II Street, 84084 Fisciano (SA), Italy.
  • Google Scholar
Jon Tucker
  • Jon Tucker
  • Faculty of Business and Law, University of the West of England, United Kingdom.
  • Google Scholar


  •  Received: 04 September 2020
  •  Accepted: 29 October 2020
  •  Published: 30 November 2020

Abstract

This study investigates the impact of the degree of financial distress on the earnings management activities of Italian non-listed firms using a linear regression model proxied by the Altman Z-Score which controls the heteroscedasticity and autocorrelation using the Petersen method. The extant literature provides mixed evidence on this relationship for listed firms. In this study we find a positive (negative) relationship between financial distress risk and income-decreasing (income-increasing) earnings management, suggesting that firms tend to manage earnings downward as financial distress risk increases. In two robustness tests, we test the power of the Kothari model and we also analyse a reduced firm sample representing over 80% of the population, though the results are qualitatively the same. Our research has several implications for academics, practitioners, lenders, and national standard setters, showing that, in contrast to the extant literature, non-listed firms are more likely to manage earnings downward as their financial situation deteriorates. Furthermore, our findings are of interest to national standard setters and professional accountants who are concerned with advanced warning indicators of firm financial problems such as Altman’s Z-score, especially in recent years in which countries are focused on developing robust empirical models to detect firm financial difficulties.

 

Key words: Financial distress, Altman’s Z-score, accrual-based earnings management, non-listed firms, Italian context.