FINANCIAL DISTRESS AND EARNINGS MANIPULATION: EVIDENCE FROM ITALIAN SMEs

M. BISOGNO¹*, R. DE LUCA^2
1Department of Management & Information Technology, University of Salerno, Italy.
²Department of Management & Information Technology, University of Salerno, Italy.
* Corresponding Author : mbisogno@unisa.it

Received : 03-12-2014     Accepted : 03-02-2015     Published : 05-02-2015
Volume : 4     Issue : 1       Pages : 42 - 51
J Account Finance 4.1 (2015):42-51

Keywords : Financial distress, Earnings management, Bankruptcy procedures, SMEs, Jones model
Conflict of Interest : None declared

This study examines the relationship between financial distress and earnings management practices in a family-owned economic context, such as Italy, focusing on non-publicly listed small and medium sized entities (SMEs). Analysing five years prior to bankruptcy, we document that private SMEs experiencing financial distress, as measured by subsequent bankruptcy filings, manipulate their financial statements to portray better financial performance. Earnings management most commonly occurs via inflated revenue and helps the firm maintain bank financing. Our results indicate that an important reason for earnings management at unlisted firms is securing outside financing, which for Italian firms most commonly represents bank loans.