Public Finance Quarterly Archive Articles

Earning Management and the Likelihood of Financial Distress in Banks

11:21, június 04, 2019.

Evidence from Pakistani Commercial Banks

Amina Malik
Research Scholar, Department of Management Sciences,
COMSATS University Islamabad, Wah Campus, Pakistan

Shahab Ud Din
Lecturer Management Sciences
COMSATS University Islamabad, Wah Campus, Pakistan

Khuram Shafi
Assistant Professor, Management Sciences
COMSATS University Islamabad, Wah Campus, Pakistan

Babar Zaheer Butt
Post Doctorate Research Fellow,
Tohoku University of Community Service & Science, Sendai, Japan

Haroon Aziz
Independent Researcher, Pakistan

Published in: Public Finance Quarterly 2019/2. (p. 208-221.)

Summary: This research studies the relationship between financial distress (FD) and usage of discretion by employing earning management practices in twenty commercial banks of Pakistan, listed at Pakistan Stock Exchange (PSX). The study utilizes the data spread over from the year 2010 to 2015. Altman Z-Score has been employed to assess financial distress. Further, the value of Z-score has been used for the classification of banks into distressed and non-distressed banks. Moreover, earning management has also been categorized into non-discretionary (NDA) and discretionary accruals (DA). The logistic approach has been used to study the relationship among variables. The findings reveal that banks use non-discretionary and discretionary accruals to manage their financial distress. This research study provides useful insights for investors, auditors and regulators as it identifies usage of specific provisions by management despite strict regulations.

Keywords: Earning Management, Financial distress, Discretionary accruals, Z-Score

JEL codes: C33, G21

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