The impact of financial reporting manipulations on the bankruptcy likelihood: A study of Nordic banks

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Abstract

The phenomenon of financial reporting manipulations and bankruptcy likelihood has always been a topic of interest among researchers. Corporate managers can have the motivation to compromise the financial reporting quality to hide the deteriorating financial health of the firms, nonetheless, if such practices go unabated then such firms can be exposed to serious outcomes in the form of their increased bankruptcy likelihood (Berglund & Makinen, 2016). The abovementioned outcome can be even more threatening in the banking sector due to its inherent nature. The current study aims to examine the impact of financial accounting manipulations on the likelihood of bankruptcy in Nordic banks. Beneish M-score model and Jones model have been applied to evaluate earnings quality, whereas financial distress has been measured by Altman Z-score model (Ebaid, 2022). Based on the analysis of secondary data collected from 33 Nordic banks for the period 2011–2018, the findings disclose that there is an absence of any systematic application of financial accounting manipulations measures, with a few exceptions, by the Nordic banks. Furthermore, there is no evidence to suggest that financial accounting manipulations increase the bankruptcy likelihood of banks. The current study is not only amongst the fewest empirical studies on the said topic conducted in the context of Nordic banks, but it also adds to methodological refinements by including two distinct measures of financial reporting quality to enhance the reliability and robustness of empirical findings.

Keywords: Accounting Manipulations, Bankruptcy, Financial Distress, Jones Model, Beneish M-Score Model, Altman Z-Score Model, Financial Performance, Discretionary Accruals

Authors’ individual contribution: Conceptualization — S.H.; Methodology — S.H.; Investigation — S.H. and A.E.; Formal Analysis — S.H.; Resources — S.H. and A.E.; Writing — Original Draft — S.H.; Writing — Review & Editing — S.H. and A.E.; Visualization — S.H.; Project Administration — S.H. and A.E.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

Acknowledgements: The Authors express their gratefulness for the feedback and suggestions that they received at the conference “Corporate Governance: Fundamental and Challenging Issues in Scholarly Research”, organized by Virtus Interpress and Virtus GCCG on November 25, 2021.

JEL Classification: G32, G33, G38, M14, M40, M48

Received: 13.11.2022
Accepted: 27.01.2023
Published online: 31.01.2023

How to cite this paper: Hundal, S., & Eskola, A. (2023). The impact of financial reporting manipulations on the bankruptcy likelihood: A study of Nordic banks. Risk Governance and Control: Financial Markets & Institutions, 13(1), 16–25. https://doi.org/10.22495/rgcv13i1p2