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Earning Management and the Likelihood of Financial Distress in Banks — Evidence from Pakistani Commercial Banks

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  • Malik, Amina
  • Din, Shahab Ud
  • Shafiq, Muhammad
  • Butt, Babar Zaheer
  • Aziz, Haroon

Abstract

This research studies the relationship between financial distress (FD) and usage of discretion by employing earning management practices in twenty commercial banks of Pakistan, listed at Pakistan Stock Exchange (PSX). The study utilizes the data spread over from the year 2010 to 2015. Altman Z-Score has been employed to assess financial distress. Further, the value of Z-score has been used for the classification of banks into distressed and non-distressed banks. Moreover, earning management has also been categorized into non-discretionary (NDA) and discretionary accruals (DA). The logistic approach has been used to study the relationship among variables. The findings reveal that banks use non-discretionary and discretionary accruals to manage their financial distress. This research study provides useful insights for investors, auditors and regulators as it identifies usage of specific provisions by management despite strict regulations.

Suggested Citation

  • Malik, Amina & Din, Shahab Ud & Shafiq, Muhammad & Butt, Babar Zaheer & Aziz, Haroon, 2019. "Earning Management and the Likelihood of Financial Distress in Banks — Evidence from Pakistani Commercial Banks," Public Finance Quarterly, Corvinus University of Budapest, vol. 64(2), pages 208-221.
    • Handle: RePEc:pfq:journl:v:64:y:2019:i:2:p:208-221
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    File URL: https://unipub.lib.uni-corvinus.hu/8693/
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    1. Malik, Amina & Butt, Babar Zaheer & Din, Shahab Ud & Aziz, Haroon, 2020. "Impact of Earnings Variability and Regulatory Measures on Income Smoothening in Islamic Banks — Evidence from an Emerging Market," Public Finance Quarterly, Corvinus University of Budapest, vol. 65(3), pages 397-410.

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    More about this item

    Keywords

    Earning Management; Financial distress; Discretionary accruals; Z-Score;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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