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An Inquiry into Earning Management Motives: Evidence from Pakistani Distressed and Non-Distressed Firms

This research takes in view the motives that drive opportunistic managers in the Pakistani corporate world to manipulate firm earnings in different financial circumstances by resorting to real (REM) and accrual (AEM) earning management to reap their self-interests. The present study undertakes 188 distressed and 37 non-distressed firms for the sample period of 2010-2017. The summary stats confirm that both in distressed and non-distressed firms’ managers resort to REM practices more than AEM. The factors that urge mangers to take REM practices in distressed firms i.e., debt covenant restriction, managerial ownership and tax avoidance needs to be amended in such a way that it demotivates managers for carrying such practices in distressed firms. The factors that influence AEM practices in distressed firms are debt covenant restrictions, institutional ownership, highly valued firms and managerial ownership whereas in non-distressed firm these factors are debt covenant and effective tax rate. In non-distressed firms motives that urge mangers to adopt REM, practices are raising additional capital and tax avoidance practices.