Investigating the impact of earnings management and business strategy on bankruptcy risk (A case study: companies listed on the Tehran Stock Exchange)

Document Type : Original Article


M.A. in Accounting, University of Allameh Mohaddes Noori, Mazandaran, Iran


This study investigates the effect of earnings management and business strategy on bankruptcy risks in companies listed on Tehran Stock Exchange. To measure profit management, accruals-based earnings management was used using the correction Jones model, and to measure the impact of business strategy, cost leadership indicators and differentiation strategies were used, and to measure bankruptcy risk variables, The Altman Z method is used. This research is empirical in terms of purpose and descriptive in nature, and in order to analyze the data and extract the results of the research, Eviews software was used. To test the hypotheses, a sample of 780 observations during a five-year period from 2015 to 2019 have been selected. The results show that earnings management has a significant and direct effect on bankruptcy risk. On the other hand, the results show that differentiation strategy and cost leadership strategy have an insignificant and negative effect on bankruptcy risk. This is interpreted as by increasing cost leadership and differentiation strategy, bankruptcy risk decreases.


Main Subjects

Altman, E.I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23(4), 589–609.
Adnan, A., M. Humayon & A. Dar. (2002). Prediction Corporate Bankruptcy: Whether Do We Stand? Department of Economics, Loughborough University, UK.
Beaver, W.G. (1966). Financial ratios as predictors of failure. Journal of Accounting Research, 4(1), 71–111.
Chen, G.Z., Keung, E.C. (2019). The impact of business strategy on insider trading profitability. Pac. Basin Finance J. 55 (April), 270–282.
Choi, J.H., Kim, J.B., & Lee, J.J. (2011). Value relevance of discretionary accruals in the Asian financial crisis of 1997–1998. Journal of Accounting and Public Policy, 30(2), 166-187.
Doi, N. (2000). The determinants of firm exit in Japanese manufacturing industries. Small Business Economics, 13, 331-337.
Disney, R., Haskel, J., & Heden, Y. (2003). Entry, exit and establishment survival in UK manufacturing. Journal of Industrial Economics, 51(1), 91-112.
David, J.S., Hwang, Y., Pei, B.K., Reneau, J.H. (2002). The performance effects of congruence between product competitive strategies and purchasing management.
Flynn, J. E. (1991). The determinants of exit in an open economy. Small Business Economics, 3, 225-232.
Katz, S., Lilien, S., & Nelson, B. (1985). Stock market behavior around bankruptcy model distress and recovery predictions. Financial Analysts Journal, 41(1), 70–74.
Hambrick, D.C. (1983). High profit strategies in mature capital goods industries: a contingency approach. Acad. Manag. J. 26(4), 687–707.
Hofer, C., Dresner, M., & Windle, R. (2005). Financial distress and US airline fares. Journal of Transport Economics and Policy, 39(3), 323–340.
Ivashina, V., Nair, V.B., Saunders, A., Massoud, N., & Stover, R. (2008). Bank debt and corporate governance. Review of Financial Studies, 22(1), 41–77.
Loomis, C. Magnan, M., Nadeau, C., Cormier, (1999). Earnings management during antidumping investigations: analysis and implications. Canadian Journal of Administrative Sciences, 16, 149–162.
MacKie-Mason, J.K. (1990). Do taxes affect corporate financing decisions? Journal of Finance, 45(5), 1471–1491.
Porter, M.E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competition, p. 300. New York.
Selling, T.I., Stickney, C.P. (1989). The effects of business environment and strategy on a firm’s rate of return on assets. Financ. Anal. J. 45(1), 43–52.
Trombetta, M., & Imperatore, C. (2014). The dynamic of financial crises and its nonmonotonic effects on earnings quality. Journal of Accounting and Public Policy, 33(3), 205-232.
Wu, P., Gao, L., Gu, T. (2015). Business strategy, market competition and earnings management: evidence from China. Chin. Manag. Stud. 9(3), 401–424.
Volume 3, Issue 3
September 2020
Pages 99-113
  • Receive Date: 14 July 2020
  • Revise Date: 31 July 2020
  • Accept Date: 20 August 2020