Effect of cash flow risk on corporate failures,and the moderating role of earnings management and abnormal compensation |
| |
| Institution: | 1. Department of Accountancy and Governance, Birmingham City University, Birmingham B4 7BD, UK;2. Department of Accounting and Finance, University of York, York YO10 5ZF, UK;3. Department of Finance, University of Birmingham, Birmingham B15 2TY, UK;4. Department of Management and Marketing, California State University, Dominguez Hills, California, CA 90747-0005, USA;1. Audencia Business School, Research Center: Markets Technology and Society, 8 Route de la Joneliere, 44312 Cedex 3, Nantes, France;2. Heriot Watt University, Accounting, Economics and Finance SEEC, CFI, Edinburgh, Scotland EH14 4AS, UK;1. Department of Quantitative Finance, College of Technology Management, National Tsing Hua University, Taiwan;2. Anfu Institute for Financial Engineering, National Tsing Hua University, Taiwan;1. College of Management, Yuan Ze University, Taoyuan City 32001, Taiwan;2. Department of Finance, National Central University, Taoyuan City 32001, Taiwan |
| |
| Abstract: | In this study, we find that United States firms' average cash flow risk (CFR) shows a significantly increasing trend over the past four decades or so. This does not portend well considering the significance of cash flows in maintaining a firm's financial health and going concern status. The CFR also increases dramatically for firms approaching financial distress or bankruptcy, suggesting its important role in predicting a firm's failure. Empirically, we find that CFR has a strong positive effect on a firm's financial distress likelihood. We also find that the association between CFR and financial distress is negatively moderated in firms with high earnings management and abnormal compensation. The results suggest that managers in firms with high CFR are more likely to use heuristics in form of earnings management. Thus, supporting the upper echelons theory related to managers under performance pressure. Meanwhile, consistent with the notion in the agency theory that financial incentives serve as effective monitoring mechanisms, compensation packages can incentivize better risk management practices and decrease the likelihood of a firm's failure. Our findings are also robust to alternative definitions of a firm's failure: financial constraints, presumed debt covenant violation and legal bankruptcy filings. |
| |
| Keywords: | |
| 本文献已被 ScienceDirect 等数据库收录！ |
|
