Distress risk, growth and earnings quality

Andreas Charitou*, Neophytos Lambertides, Lenos Trigeorgis

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


We extend and complement prior work by investigating the earnings quality of firms with different financial health characteristics and growth prospects. By using three alternative measures of default likelihood and two alternative measures of growth options, without being limited to a specific event, we provide a more comprehensive setup for analysing the earnings characteristics of the universe of firms than examining distressed firms with persistent losses, dividend reductions or bankruptcy-filings. Our dataset consists of 15,049 healthy U.S. firms over the period 1990-2004. Results show that the relation between earnings quality and financial health is not monotonic. Distressed firms have a low level of earnings timeliness for bad news and a high level for good news, and manage earnings toward a positive target more frequently than healthy firms. On the other hand, healthy firms have a high level of earnings timeliness for bad news. Growth aspects play an important role in a firm's ability to manage earnings. In contrast to the findings of prior studies, growth firms have greater earnings timeliness for bad news, whereas value firms manage earnings toward a positive target more frequently than growth firms.

Original languageEnglish
Pages (from-to)158-181
Number of pages24
Issue number2
Early online date1 Jun 2011
Publication statusPublished - Jun 2011


  • distress risk
  • earnings quality
  • growth options


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