Distress Risk, Growth and Earnings Quality

24 Pages Posted: 6 Jun 2011

See all articles by Andreas Charitou

Andreas Charitou

University of Cyprus

Neophytos Lambertides

Cyprus University of Technology

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration; King's College London; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: June 2011

Abstract

We extend and complement prior work by investigating the earnings quality of firms with different financial health characteristics and growth prospects. By using three alternative measures of default likelihood and two alternative measures of growth options, without being limited to a specific event, we provide a more comprehensive setup for analysing the earnings characteristics of the universe of firms than examining distressed firms with persistent losses, dividend reductions or bankruptcy‐filings. Our dataset consists of 15,049 healthy U.S. firms over the period 1990–2004. Results show that the relation between earnings quality and financial health is not monotonic. Distressed firms have a low level of earnings timeliness for bad news and a high level for good news, and manage earnings toward a positive target more frequently than healthy firms. On the other hand, healthy firms have a high level of earnings timeliness for bad news. Growth aspects play an important role in a firm's ability to manage earnings. In contrast to the findings of prior studies, growth firms have greater earnings timeliness for bad news, whereas value firms manage earnings toward a positive target more frequently than growth firms.

Keywords: Distress risk, Earnings quality, Growth options

Suggested Citation

Charitou, Andreas and Lambertides, Neophytos and Trigeorgis, Lenos, Distress Risk, Growth and Earnings Quality (June 2011). Abacus, Vol. 47, Issue 2, pp. 158-181, 2011. Available at SSRN: https://ssrn.com/abstract=1857286 or http://dx.doi.org/10.1111/j.1467-6281.2011.00337.x

Andreas Charitou (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893624 (Phone)
+357 2 895030 (Fax)

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
00357 2 338762 (Phone)
00357 2 339063 (Fax)

King's College London ( email )

Strand
London, WC2R 2LS
United Kingdom

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

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