Reviewing the Effectiveness of Earnings Quality Indices on the Power of Financial Distress Prediction Models

Document Type : Research Paper

Authors

1 Associate Prof. in Accounting, Faculty of Management, University of Tehran, Tehran, Iran

2 Assistant Prof. in Accounting, Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran

3 Instructor in Accounting, Faculty of Economics and Management, Urmia University, Urmia, Iran

Abstract

This study aims at comparing the earnings quality indices in both distressed and healthy firms and determining their effectiveness on the financial distress and the power of predicting models. Therefore, the information provided by 211 distressed firms selected by certain distress criteria and 211 healthy firms listed in Tehran Stock Exchange during 2006-2015 is used. In this study, twenty-seven financial indices and three earnings quality indices including “accruals quality”, “absolute value of abnormal accruals” and “earnings volatility” are applied. Findings reveal that earnings quality of the distressed firms is significantly less than the healthy ones. In addition, by increasing the earnings quality indices, the probability of encountering with financial distress position decreases. Finally, adding the earnings quality indices to the primary model based on financial indices enriches its predictability

Keywords

References

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Accounting and Auditing Review
Volume 24, Issue 1
2017
Pages 103-126

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