Earnings management among bankrupt non-listed firms: evidence from Spain

We analyse whether Spanish non-listed bankrupt firms are more inclined to manage earnings in comparison with their non-bankrupt pairs during the years preceding a legal procedure for bankruptcy. We also investigate the techniques these companies employ to manage earnings and when they start using earnings manipulation practices. Analysing a matched sample of bankrupt and healthy companies, we find that bankrupt firms manage earnings upwards more than their healthy pairs. They achieve that by employing both accrual and real activity manipulation. These two practices start at least three years before the beginning of the bankruptcy procedure, but real activity manipulation stops the year immediately before filing for bankruptcy. Findings also indicate that earnings management tools change based on the industry in which firms operate and the number of years preceding the bankruptcy. This evidence is relevant to governments, monitoring bodies and all those involved in an insolvency procedure.