Exploring Relationship Between Earnings Management, Financial Distress, Leverage and Profitability

Abstract

This study will examine the correlation of earnings management, financial distress, leverage, and free cash flows within the framework of leading Jordanian enterprises. Managers are more inclined to exaggerate their stated profitability to leverage the company's already substantial profits. Because free cash flow and earnings management are inversely related, managers will use earnings management to make sure that operations stay open and running when cash flow is low. Researchers also discovered that strict external oversight decreases the probability of managers engaging in earnings management. The negative relationship between having money problems and managing earnings suggests that managers may change how things are done when things are going well and when things are going badly.