Correlation between Earnings Management and Financial Distress among Selected Firms in Kenya

Abstract

Background This paper evaluates the link between earnings management and financial distress among listed firms in Kenya. Earnings management is the use of accounting practices to prepare financial statements that portray a company's business activity and financial status in an unrealistically favorable manner. On the other hand, financial distress is when an organization's revenues or income no longer satisfy its financial obligations, resulting in bankruptcy and possible dissolution. Results The assessment compares the modified Jones score, which is commonly used to measure discretionary accruals, with Altman’s Z score, which measures the degree of financial distress. The earnings management and financial distress. The selected firms under this study are known to be financially distressed as per the publicly available information. The hypothesis tests express whether a correlation exists between earnings management and financial distress. The result also highlights the level of significance of the effect of earnings management on financial distress. Conclusion The study concludes that there is some moderate probability that a financially distressed firm is likely to practice earnings management. On the other hand, there is a moderate likelihood that firms that practice earnings management may face financial distress at some point. Earnings management is not necessarily practiced to camouflage financial distress, but that does not mean that it cannot happen. On the other hand, financial distress is not an indicator of earnings management and vice versa.

Pre- and Post-Covid Analysis of Earnings Management and Financial Distress Among Nairobi Securities Exchange-Listed Firms

“…It should be noted that, despite the association between financial distress and earnings management, each factor does not significantly impact the other. Nevertheless, the occurrence of financial distress within companies may offer management the motivation to manipulate earnings, particularly in the absence of effective corporate governance systems (Kamau et al, 2022). Analyzing the intricate interconnection between financial distress, earnings manipulation, and corporate oversight is likely to uncover the underlying mechanisms involved in this multifaceted phenomenon, and provide pragmatic implications for both businesses and investors.…”

Dividend Decisions and Economic Value-Added of Firms in Kenya

“…The performance of a company is determined by its management policy, which is defined at the start of operations, targeted plans, and operational business strategies that consumers can monitor and evaluate based on satisfaction, sales, earnings, and other operational challenges (Sondakh, 2019). Some of the key variables affecting earnings are free cash flow, management compensation, dividend payments, and the amount of debt (Kamau, Banafa, & Kariuki , 2022). A company's ability to grow and compete more successfully against both established and upand-coming rivals is influenced by the efficiency of its operations, which in turn strengthens the company's competitive edge.…”

Effect of Corporate governance on Financial Distress among the Firms Listed at Nairobi Securities Exchange

“…Furthermore, the research observes that the corporate governance disclosure index, board sub-committees, size of boards, and non-executives who are independent are favorable but slightly associated with financial performance. Kamau et al (2022) conducted a study to determine the possibility that any relationship exists between earnings management and financial distress. The analysis further emphasizes the degree of significance of the influence of earnings management on financial distress.…”