Financial Distress and Earnings Management An Empirical Study of Non-Financial Firms Listed on the Indonesia Stock Exchange

Abstract

This study examines the relationship between financial distress and earnings management among non-financial companies listed on the Indonesia Stock Exchange during the period 2018–2022. This study uses a quantitative approach using the modified Jones model to measure discretionary accruals, with leverage, firm size, and profitability included as control variables. Data from 342 companies are analyzed to determine whether companies facing financial distress are more likely to engage in earnings management as a strategy to improve their financial performance.

The findings reveal that profitability has the strongest positive effect on earnings management, indicating that firms with higher profitability are more likely to manipulate earnings to improve financial results and meet market expectations. In contrast, leverage shows a significant negative effect, indicating that firms with higher debt levels are less likely to engage in earnings manipulation due to increased creditor monitoring and financial discipline. Meanwhile, financial distress and firm size have minimal impacts, with their coefficients showing no significant effect on discretionary accruals.

These results highlight the importance of profitability and leverage as key drivers of earnings management while suggesting that financial distress and firm size play a smaller role in this context. This study acknowledges limitations, including its focus on non-financial firms in Indonesia, the five-year observation period, and the exclusion of additional factors such as governance and macroeconomic conditions. Future research could address these limitations by expanding the data set, incorporating more variables, and exploring other emerging markets.