Investigating the effect of bankruptcy spillover on financial reporting quality

Document Type : Research Paper

Authors

1 Associate Professor, Department of Accounting, Faculty of Administrative Sciences, Imam Reza International University, Mashhad, Iran.

2 M.Sc. Student, Department of Accounting, Faculty of Administrative Sciences, Imam Reza International University, Mashhad, Iran

Abstract

Purpose: This study aims to determine the effect of peer firms' bankruptcy on financial reporting quality. Theoretically, it is expected that the effect of the peer firm bankruptcy will go beyond that company and significantly affect companies in the same industry.
Methodology: Information about 175 companies listed on the Tehran Stock from 2012 to 2020 will be examined. In terms of methodology, the current research is regression and correlation type.
Results: Findings show no significant relationship between peer bankruptcy and conservatism, accrued earnings management, and earnings response coefficient‌‌. However, supplementary studies suggest that there is a significant relationship between peer firms' bankruptcy and real earning management among firms with reduced earnings management‌‌.
Conclusion: Overall, this study shows that the bankruptcy of a peer firm causes other companies operating in that industry to manipulate real activities to reduce earnings. The effect of the bankruptcy of competitors on the management of real profits and its lack of impact on the management of accrued profits can be justified by the fact that due to the monitoring mechanisms such as the existence of independent audits, companies tend to manipulate through accruals when they receive bad news from competitors. Are more inclined to manipulation through real activities because auditors' supervision is mostly done on accrual items and this manipulation is mostly in the direction of profit reduction‌‌.
Contribution: Findings show that the bankruptcy of a company not only affects the quality of its financial reporting but also affects some measures of financial reporting quality of its peers‌‌.

Keywords

References

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History

  • Receive Date: 21 January 2022
  • Revise Date: 20 December 2022
  • Accept Date: 23 December 2022

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