Earnings Management to Avoid Financial Distress and Improve Profitability: Evidence from Jordan

  •  Mohammad Humeedat    


Due to unstable economic and political conditions, many companies in the Middle East are undergoing various financial distress and decline in profitability. This paper examines the role of earnings management to avoid financial distress and improve profitability in 58 industrial corporations listed on Amman Stock Exchange for a period of 2011 to 2016, which constitutes 89% of the whole population. The total number of observations is 413 for the entire study period. The study uses a cross-sectional Jones model that was modified by (Kothari, Leone, and Wasley, 2005); to measuring discretionary accruals that used as a proxy for earnings management.

The empirical results indicate that earning management is not affected by the Altman’s Z-score index, but it has a positive relationship with debt to equity ratio. This study also shows a positive relationship between earnings per share, returns on equity, and earnings management. Regarding the control variable, we found a negative relationship between cash flow from operation and discretionary accruals.

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