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

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.