Fixing the Core, Earnings Management, and Sustainable Emergence From Financial Distress: Evidence From China’s Special Treatment System

Jiao Jing, Kenneth Leung, Jeffrey Ng, Janus Jian Zhang*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    1 Citation (Scopus)
    13 Downloads (Pure)

    Abstract

    Throughout their business life cycle, firms may experience financial distress. Successful emergence from such distress is important to their multiple stakeholders. Using a sample of publicly listed firms in China that emerged from Special Treatment (an indicator of delisting risk), we focus on the key actions such firms take prior to emergence, namely, fixing the core of the business and earnings management. We examine how these actions are associated with sustainable emergence, which we define as emergence from Special Treatment without reentry in the next 5 years. Consistent with the expectation that shortcut fixes to problems do not yield a long-term solution, we find that repairing the core of the business by improving operating efficiency is positively associated with sustainable emergence, whereas earnings management is negatively associated with it. We also find that the positive (negative) association between fixing the core (earnings management) and sustainable emergence is pronounced only for state-owned enterprises. Our article adds to the limited literature that examines issues related to distressed firms’ sustainable turnaround.
    Original languageEnglish
    Pages (from-to)107-132
    Number of pages26
    JournalJournal of Accounting, Auditing & Finance
    Volume39
    Issue number1
    Early online date9 Oct 2021
    DOIs
    Publication statusPublished - Jan 2024

    Scopus Subject Areas

    • Accounting
    • Economics, Econometrics and Finance (miscellaneous)
    • Finance

    User-Defined Keywords

    • corporate governance
    • earnings management
    • financial distress
    • postbankruptcy
    • reorganization

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