THE INFLUENCE OF FINANCIAL DISTRESS ON EARNING MANAGEMENT: AN INSIGHT ON PAKISTAN TEXTILE SECTOR

Abstract

Earnings management has recently been a current Area of focus among professionals and Overseers. It has sparked significant curiosity among academic scholars throughout the world. The study aimed to examine the impact of financial distress on EM (earnings management) in the setting of Pakistan. Data was collected from a sample of 25 textile enterprises experiencing financial distress throughout 5 years from 2018 to 2022. Using Altman's Z-Score, the extent of financial Distress was calculated. Financial distress is monitored using proxies such as free cash flow, financial leverage, business size, liquidity, and profitability. Discretionary accrual (DA), a Stand-in for EM (earnings management), has been found using the Modified Jones Model. Econometrics Analytics was employed to gain insight into the impact of financial distress on earnings management. The data analysis demonstrates that profitability and EM (earnings management) have a strong positive relationship, as does the relationship between FCF (free cash flow) and EM (earning management). Financial leverage and earnings management have a negative relationship, but this relationship is not statistically significant. The Analysis of FS (firm Size) reveals that there is no statistically significant relation, suggesting that a company's size has little to no impact on EM. Liquidity has a negative influence on earning management in financially distressed corporations, though it is not statistically significant. These findings could assist lenders and investors in understanding that even enterprises in financial trouble may engage in earnings management strategies.