Distressed firms and the secular deterioration in usefulness of accounting information

We investigate the relative and incremental usefulness of earning, cash flows, accruals and book values of financially distressed firms to extend our understanding of the price–earnings relationships of distressed firms. As expected, we find that earnings usefulness deteriorates with the onset of di...

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Bibliographic Details
Published in:Journal of business research 2006-02, Vol.59 (2), p.295-303
Main Authors: Joseph, George, Lipka, Roland
Format: Article
Language:English
Subjects:
Accounting earnings
Accounting interpretations
Accruals
Bankruptcy
Book values
Business accounting
Business information
Business studies
Cash flow
Cash flows
Earnings
Economic information
Economic performance
Enterprises
Financial distress
Financial reporting
Price earnings ratio
Studies
Value relevance
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Summary:We investigate the relative and incremental usefulness of earning, cash flows, accruals and book values of financially distressed firms to extend our understanding of the price–earnings relationships of distressed firms. As expected, we find that earnings usefulness deteriorates with the onset of distress. We document that the decline in usefulness of earnings is initially gradual and then steep. We also document a surprisingly comparable decline in the usefulness of operating cash flows. Further, we find that accruals continue to provide incrementally useful information beyond cash flows up to 1 year prior to the bankruptcy or liquidation election. Our results hold even when the effects of book values and solvency measures are controlled.
ISSN:0148-2963
1873-7978
DOI:10.1016/j.jbusres.2005.05.002