Integrity of Financial Information as a Determinant of the Outcome of a Bankruptcy Procedure

The outcome of a bankruptcy procedure – ‘liquidation' or ‘reorganization' – has many legal, economic and social consequences for stakeholders of financial distressed companies. The objective of this paper is to show whether financial information integrity is a determinant for a ‘liquidation' or ‘reorganization' decision. Two measures of earnings management as proxies for financial reporting integrity are used on a matched sample of 2,064 Spanish bankrupt and healthy companies. The results indicate that only firms which receive a ‘liquidation' decision manipulate earnings more than their pairs. This study helps to shed light on the consequences of earnings management during a bankruptcy procedure