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

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  • Li, Yuanhui
  • Li, Xiao
  • Xiang, Erwei
  • Geri Djajadikerta, Hadrian

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.

Suggested Citation

  • Li, Yuanhui & Li, Xiao & Xiang, Erwei & Geri Djajadikerta, Hadrian, 2020. "Financial distress, internal control, and earnings management: Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    • Handle: RePEc:eee:jocaae:v:16:y:2020:i:3:s1815566920300242
    DOI: 10.1016/j.jcae.2020.100210
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    More about this item

    Keywords

    Financial distress; Internal control; Accrual earnings management; Real earnings management;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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