Earnings Management of Insolvent Firms and the Prediction of Corporate Defaults via Discretionary Accruals

Studies on the characteristics of insolvent firms’ earnings management are critical, as ripple effects a firm’s opportunistic accounting and insolvency society can be widespread significant. This study divides dataset unlisted firms into four groups (large that have received external audits; small- medium-sized enterprises (SMEs) SMES did not receive private businesses audits) analyzes whether there differences in terms discretionary accruals between groups. also uses discrete time logit regression to determine if use is predictive would become insolvent. used several models (a modified Jones model, Kothari performance matching model by ROA group) measure accruals, which was proxy for management. The results our showed that, one year prior insolvency, were largest among non-externally audited firms, followed those SMEs, externally large firms. non-insolvent larger than from period three years preceding this difference increased approached. shown ability predict or two before occurrence but they support prediction insolvency. findings suggest additional information should together