Bankruptcy Risk and Its Effect on Earnings Management of Indonesian Firms

Accounting Department, School of Accounting, Bina Nusantara University, Jakarta, Indonesia 11480

^* Corresponding author: fathullah.nareswara@binus.ac.id

Abstract

The purpose of this study is to examine whether there is a notable relationship between bankruptcy risk measured by Altman Z-Score and earnings management in Indonesia. While many prior studies have analyzed the relevance of financial distress (which is often associated with bankruptcy risk) towards earnings management, there only exist few studies, to the best of authors’s knowledge, that specifically uses bankruptcy risk itself as one of possible influencing factors on earnings management. Regression analysis is performed on the financial data of firms listed in Indonesia Stock Exchange (IDX), with the final sample comprised of 404 firm-year observations. Using bankruptcy risk as the independent variable, the result indicates that there is no significant relationship between bankruptcy risk and earnings management, which is the similar conclusion that had been reached by few prior studies on the same topic.