Earnings quality in ex-post failed firms

This paper analyses earnings quality in ex-post failed firms. Using a large sample of UK bankrupt firms, find that failed firms manage earnings upwards in the four years prior to failure. This manipulation is achieved two ways: (1) through accounting (accruals) manipulation; and (2) by implementing real operating actions that from normal practice. We show that these two types of manipulation lead to reduced earnings reliability. use conditional conservatism as a proxy for reliability, as prior literature links conditional accounting conservatism better governance and positive economic outcomes. Our results show that conditional conservatism substantially in the years prior to failure. Finally, we show that accruals manipulation is more pronounced ex-post bankrupt firms with low ex-ante probability of failure, and that ex-post bankrupt firms with high ex-ante probability, having likely exhausted the opportunities for accrual manipulation, manipulate real operations aggressively