Earnings quality in relation to stress level and bankruptcy level of Chinese listed companies

This paper investigates the earnings quality of Chinese companies listed in Shanghai and Shenzhen stock exchanges from 2003 to 2007 by classifying them into stressed and bankrupt, stressed and non-bankrupt, non-stressed and bankrupt, and non-stressed and non-bankrupt. We measure the earnings quality by four separate attributes: accruals quality, earnings persistence, earnings predictability, and earnings smoothness. We find that the stressed and bankrupt firms have the lowest earnings quality measured by each of the four earnings attributes. The stressed and non-bankrupt firms have a higher earnings quality compared with the stressed and bankrupt firms. The non-stressed and non-bankrupt firms have the highest earnings quality. We find that the earnings quality deteriorated over the study period, the number of stressed and bankrupt firms increased, and the number of non-stressed and non-bankrupt firms decreased.