The effects of the global financial crisis on Financial Distress, Earnings management and market pricing of accruals

اقتصاد پولی مالی

Article 6, Volume 29, Issue 23, October 2022, Pages 168-193   

Document Type: Original Article

DOI: 10.22067/mfe.2022.74040.1143

Authors

farshid Kheirollahi¹; Seyed Javad Delavari²; omid yousefi^{* 3}

¹Ph. D Accounting Associate Professor, Razi University, Kermanshah, Iran.

²Ph. D Accounting Associate Professor, Razi University, Kermanshah, Iran

³Corresponding Author, Accounting MSc Student Razi, University, Kermanshah, Iran.

Abstract

 
1- INTRODUCTION
The financial crisis of the last decade has impacted financial markets significantly and has led to a remarkable reduction in the financing through the issuance of shares by companies and financial institutions. Additionally, it has given rise to an increase in the amount of debt in capital structure of companies; therefore, many companies are unable to repay their debts during the of crisis, exposing companies to financial distress and opportunistic behaviors
 
2- THEORETICAL FRAMEWORK
 With the occurrence of the global financial crisis, the price of metals, oil, and including the country's oil revenues will decrease, which will initially cause a budget deficit through the reduction of government revenues. With the decrease in government revenues, the amount of government expenditures decreases, and the result is a decrease in investment and a decrease in demand, and the creation of economic imbalances, including recession in the economy. that this effect on exporting companies is more tangible due to the reduction of the general level of prices in the world markets; As a result, warehousing costs and other costs in these companies increase and they face the problem of lack of liquidity; On the other hand, it lowers investors' expectations of the growth and profitability of these companies, which ultimately increases the possibility of not being able to repay the interest and principal of debts. As a result, capital gains in investment companies decrease and put the companies on the verge of financial helplessness. When companies are on the verge of financial helplessness, they may take profit management in order to deal with the crisis and not lose shareholders, in order to make their situation more stable. Also, the management can influence the company's profit through optional accrual items in ways such as early recognition of revenues or postponing the recognition of expenses. What draws the attention of experts to the quality of accruals as an indicator of the quality of profit; The information content of accrual items components, in other words, the separation of accrual items components can provide information about the company's performance, but the market reacts to this information slowly; Therefore, the components of accruals can be considered as an indicator for determining the improvement or deterioration of the company. The aim of this study is the investigation of the impact of the global economic crisis on financial distress, earning management, and the pricing of accruals of companies listed on the Tehran Stock Exchange.
 
3- METHODOLOGY
The multivariate regression model and combined data were used to analyze the data and test the hypotheses. In order to show the explanatory power of the variables and to evaluate their importance, paired t-test was used. To test these effects, 104 companies listed on the Tehran Stock Exchange during the period 2008 to 2020 were studied.
 
4- RESULTS & DISCUSSION
There is a significant difference between financial helplessness during the period of the global financial crisis and the period after it; therefore, it can be expected that the global financial crisis will expose companies to financial helplessness and even bankruptcy. There is a significant difference between profit management during the global financial crisis and the period after it; when a company is exposed to a financial crisis, the company's management is affected by reducing its rewards, changing management and losing its reputation. Companies to secure financing and attract investors by making the financial performance of companies attractive during the period of financial crises. , have enough motivation to hide the deteriorating performance of the company by resorting to accounting choices, and finally, there is a significant difference between the pricing of accruals during the global financial crisis period and the period after it; Therefore, during the period of the global financial crisis, managers who try to manage profits to hide the dire situation of the company, there is an incentive for them to do this through the manipulation of discretionary accruals that are part of the net profit.
 
5- CONCLUSIONS & SUGGESTIONS
The findings of this study indicate the impact of the global financial crisis on the financial performance of companies and put them on the verge of financial distress. This occurs due to the inability of financing and as well as the motivation of managers to hide the deteriorating performance of the company by taking measures such as earning management and the pricing of accruals increases. Therefore, during the period of the global financial crisis, managers who attempt to manage profits to hide the dire situation of the company, have the incentive to do so by manipulating discretionary accruals that are part of net profit; Because accruals provide information about the company's performance and because it is an indicator to determine the improvement or deterioration of the company, there is always the motivation to manipulate it within the framework of accounting principles through the time of recognition of revenues and expenses as a tool for managing profits by management.

Keywords

global financial crisis؛ Financial Distress؛ earnings management; market pricing of accruals

References

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