Role of earnings management and capital structure in signalling early stage of financial distress: a firm life cycle perspective

Abstract

Globally, the unravelling of the corporate scandals leading to big multinational firms stumbling down to bankruptcy suits caused enormous loss of wealth to the investors. This study explores how the earnings management and capital structure can signal an early stage of the distressed financial condition of firms during the firm life cycle in Indian listed companies. The sample firms for the study are the non-financial firms listed on the Bombay Stock Exchange. The study uses fixed-effects and random-effects analyses. The findings of the study indicate that discretionary accruals quality can predict the early stage of financial distress in the decline stage of firm life cycle. Understanding the information embedded in the discretionary accruals and leverage during various life cycle stages can lead to better investing, financing, operating and policy-related decisions. This study provides novel insights into the relationship between earnings management and firm life cycle. Focusing on the inter-relationship between financial distress signalling, earnings management, capital structure and firm life cycle, this work adds significantly to the finance literature.