The Impact of Earnings Quality on the Corporate Financial Distress: Empirical Evidence from Egypt

Abstract

Purpose -This paper examines the influence of earnings quality on the financial distress of firms registered on the Egyptian Stock Exchange.Design/methodology/approach-It scrutinizes a sample of 85 listed firms on the Egyptian Stock Exchange throughout the period 2015-2019 with 425 observations. Earnings quality is measured by accrual quality and financial distress is determined by Altman Z-score. The results are derived according to regression analysis, Pearson correlation, discriminant analysis and sensitivity analysis. Findings -The results demonstrated a adverse substantial relationship between earnings quality and financial distress. The results support the notion that earnings quality has a significantly impacts financial distress. Furthermore, results indicated that there is a positive substantial influence of leverage on financial distress in Egypt.Additionally.the results revealed that there is a significant discriminant among the Egyptian industries or sectors concerning earnings quality and financial distress. Practical implication -The results highlight the contribution of earnings quality to financial distress within emerging markets. In addition, the study adds to the existing literature concerning earning quality model and its consequences for the decision making process related to the shareholders and stakeholders and other internal and external users of financial reports.Originality/ value -The study provides novel empirical evidence related to the earnings quality consequences of the financial distress in the Egyptian context.