ISSN: 2222-6990
Open access
The main objective of this study is to determine the choice of earnings management approach among financially distressed firms in the period before and during the COVID-19 pandemic. The manager may choose either Accrual Earnings Management (AEM) or Real Earnings Management (REM). This study uses the modified Jones, 1991, model for AEM. Whereby for REM is the Abnormal Cash Flow from Operation (AbCFO), Abnormal Production Cost (AbPROD), and Abnormal Discretionary Expenses (AbDISEXP) model by Roychowdhury, 2006. Using a final sample of 672 firms year observation consisting of Malaysian public listed companies for the period of 2018 to 2021, this study reveals that financially distressed firms do manipulate earnings using the REM approach both before and during the pandemic. Further analysis discovers that those firms specifically practice AbCFO and AbDISEXP in managing earnings. This study also finds a significant negative relationship between financial distress and the AEM approach. In addition, some other control variables such as leverage, firm size, ROA and liquidity also have a significant effect on EM. This study contributes to the earnings management literature, notably how managers choose to manipulate earnings at the different levels of financial health, which then can influence the accounting earnings quality.
Agrawal, K., & Chatterjee, C. (2015). Earnings management and financial distress: Evidence from India. Global Business Review, 16, 140-154.
Agustia, D., Muhammad, N. P. A., & Permatasari, Y. (2020). Earnings management, business strategy, and bankruptcy risk: Evidence from Indonesia. Heliyon, 6(2), e03317.
Ali, H., Amin, H. M. G., Mostafa, D., & Mohamed, E. K. A. (2022). Earnings management and investor protection during the COVID-19 pandemic: Evidence from G-12 countries. Managerial Auditing Journal.
Asquith, P., Gertner, R. Sharfstein, D. (1994). Anatomy of financial distress: an explanation of junk bond issuers. The Quarterly Journal of Economics, 109, 625-658.
Azizah, W. (2017). Opportunistic perspective of accrual and real earnings management in Indonesia. IOSR Journal of Business and Management, 19 (11), 1–05.
Bisogno, M., & De Luca, R. (2015). Financial distress and earnings manipulation: evidence from Italian SMEs. Journal of Accounting and Finance, 4(1), 42–51.
Campa, D., & Miriano, M. M. C. (2015). The impact of SME’s pre-bankruptcy financial distress on earnings management tools. International Review of Financial Analysis, 42, 222-234.
Campa, D. (2019). Earnings management strategies during financial difficulties: A comparison between listed and unlisted French companies. Research in International Business and Finance, 50, 457-471.
Charitou, A., Lambertides, N., & Trigeorgis, L. (2007). Earnings behaviour of financially distressed firms: The role of institutional ownership. Abacus, 43(3), 271–296.
Chen, M. C., & Tsai, Y. C. (201 0). Earnings management types and motivation: A study in Taiwan. Social Behaviour And Personality, 38(7) , 955-962.
Cohen, D., and Zarowin, P., (2010). Accrual-based and real earnings management activities around seasoned equity offering. Journal of Accounting and Economics, 50, 2-19.
Datastream International. (2022). Available: Refinitiv Workspace.
Dechow, P. M., & Skinner, D. J. (2000). Earnings management: reconciling the views of accounting academics, practitioners, and regulators. Accounting Horizons, 14(2), 235-250.
Demirkan, S., & Platt, H. (2009). Financial status, corporate governance quality, and the likelihood of managers using discretionary accruals. Accounting Research Journal, 22(2), 93-117.
Ghazali, A. W., Shafie, N. A., & Sanusi, Z. M. (2015). Earnings management: an analysis of opportunistic behaviour, monitoring mechanism and financial distress. Procedia Economics and Finance, 28, 190-201.
Habib, A., Bhuiyan, M. B. U., & Islam, A. (2013). Financial distress, earnings management and market pricing of accruals during the global financial crisis. Managerial Finance, 39(2), 155-180.
Haga, J., Hoglund, H., & Sundvik, D. (2018). Stock market listing status and real earnings management. Journal of Accounting and Public Policy, 37(5), 420-435.
Hamid, F., Hashim, H. A., & Salleh, Z. (2012). Motivation for earnings management among auditors in Malaysia. Procedia - Social and Behavioral Sciences, 65, 239 – 246.
He, X., & Jianqun, X. (2021). The COVID-19 and earnings management: China’s evidence. Journal of Accounting and Taxation, 13(2), 59-77.
Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365-383.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economics Review, 76(2), 323-329.
Jones, J. J. (1991). Earnings management during import relief investigations. J. Account. Res. 193–228.
Joosten, C. (2012). Real earnings management and accrual-based earnings management as substitutes. Tilburg University Master Thesis. Retrieved from
arno.uvt.nl/show.cgi?fid=127248
Karina, R., & Soenarno, Y. N. (2022). The impact of financial distress, sustainability report disclosures, and firm size on earnings management in the banking sector of Indonesia, Malaysia, and Thailand. Accounting and Management Information Systems, 21 (2), 289 - 309.
Kjærland, F., Kosberg, F., & Misje, M. (2020). Accrual earnings management in response to an oil price shock. Journal of Commodity Markets, 22(3), 100-138.
Kim, B. H., Lei, L., & Pevzner, M. (2011). Debt covenant slack and real earnings management. SSRN Working Paper Series. Retrieved from
http://search.proquest.com/docview/815316704?accountid=26357
Lassoued, N., & Khanchel, I. (2021). Impact of COVID-19 pandemic on earnings management: an evidence from financial reporting in european firms. Global Business Review, 1-25.
Li, Y., Li. X., Xiang, E., & Djajadikerta, H. G. (2020). Financial distress, internal control and earnings management: Evidence from China. Journal of Contemporary Accounting and Economics, 16.
Lidsa, I. R., & Julisar, J. (2022). Factors influencing earnings management practices. Advances in Economics, Business and Management Research, 65, 12-19.
Ljubisavljevic, A., & Jakobsson, C. (2022). Earnings management during the Covid-19 Pandemic: evidence from Sweden.
Muljono, D. R., & Suk, K. S. (2018). Impacts of financial distress on real and accrual earnings management. Jurnal Akuntansi, 22(2), 222-238.
Nagar, N., & Sen, K. (2016). Earnings management strategies during financial distress. IIMA Working Paper No. 2016-02-03, Indian Institute of Management Ahmedabad, Research and Publication Department.
Rakshit, D., & Paul, A. (2020). Earnings management and financial distress: an analysis of Indian textile companies. Journal of Economics and Public Policy, 5 (3), 40 - 53.
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42 (3), 335-370.
Estrada, F. M. A., Koutronas, E., & Lee, M. (2020). Stagpression: The economic and financial impact of Covid-19 Pandemic. Available at: https://papers.ssrn.com/sol3/papers.cfm
Rusci, V. A., Santosa, S., & Fitriana, V. E. (2021). Financial distress and earnings management in Indonesia: The role of independent commissioners. JIAFE (Jurnal Ilmiah Akuntansi Fakultas Ekonomi), 7(1), 89-104.
Ryu, H., & Chae, S. J. (2022). The Impact of COVID-19 on Earnings Management in the Distribution and Service Industries. Journal of Distribution Science, 20 (4), 95-100.
Spina, S., Marrazzo, F., Migliari, M., Stucchi, R., Sforza, A. and Fumagalli, R. (2020). The response of Milan’s emergency medical system to the COVID-19 outbreak in Italy. The Lancet, 395 , 49-50.
Sweeney, A. P. (1994). Debt covenant violations and managers’ accounting responses. Journal of Accounting and Economics, 17, 281-308.
Xiao, H., Xi, J. (2021). The COVID-19 and earnings management: China’s evidence. Journal of Accounting and Taxation, 13(2), 59-77.
Zang, A. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675–703.
In-Text Citation: (Zamri et al., 2022)
To Cite this Article: Zamri, N., Fatzel, F. H. M., Abdullah, W. R. W., & Omar, N. (2022). Financial Distress and Earnings Management: Evidence from Malaysia before and during the COVID-19 Pandemic. International Journal of Academic Research in Business and Social Sciences, 12(11), 85 – 103.
Copyright: © 2022 The Author(s)
Published by Human Resource Management Academic Research Society (www.hrmars.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non0-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode