Vol. 11 No. 2 (2025)
June

Articles

Foretelling or foresight? Accounting-based bankruptcy prediction models and earnings quality in the case of Polish listed companies

Published 2025-06-30

  • Barbara Grabińska
    • ,
  • Konrad Grabinski

Barbara Grabińska
Krakow University of Economics

Konrad Grabinski
Krakow University of Economics

Abstract

Objective: The article aims to examine the relationship between bankruptcy risk and earnings quality in designing accounting-based bankruptcy prediction models. The models classify companies (firm-year observations) into two groups with high or low (no) bankruptcy risk. We investigated the difference in earnings quality between those two groups.

Research Design & Methods: We used quantitative research methods, such as descriptive statistics, correlation analysis (Pearson’s and Spearman’s rank correlation), and Welch ANOVA. The study sample consisted of firm-year observations of companies listed in the Warsaw Stock Exchange for 17 years (2007-2023) ranging from 5 004 up to 5 688 firm-year observations. We employed five accounting-based bankruptcy prediction models specific to the Polish context and two metrics of earnings quality: accrual and real earnings management. We estimated the proxy of accrual earnings management using the modified Jones model and real earnings management with the Roychowdhury model. We estimated the bankruptcy risk using five prediction models and then analyzed as a continuous (in correlation analysis) and dichotomous variable (Welch ANOVA).

Findings: The research results demonstrate that companies classified by company failure models as high bankruptcy risk are associated with lower earnings quality. The results of the Welch ANOVA analysis are consistent across all combinations of accounting-based prediction models and earnings quality proxies used in the study research. The findings imply that a high bankruptcy risk is associated with managers engaging in more intensive accrual and real earnings management. The results suggest managers are more inclined to influence reporting numbers and operational activities to achieve desired goals.

Implications & Recommendations: Scholars should consider diminishing the quality of earnings associated with higher bankruptcy risk in designing and developing future accounting-based bankruptcy prediction models. Financial statement users like investors, financial analysts, financial auditors, and other stakeholders should also consider earnings quality. The study provides an avenue for future research by calling for research across earnings quality and bankruptcy prediction models.

Contribution & Value Added: The study contributes to a better understanding of the relationship between accounting-based bankruptcy prediction models and how they estimate bankruptcy risk and earnings quality. As far as we know, earnings quality has not been considered a factor in the design of models for bankruptcy prediction.

Keywords

bankruptcy prediction, accounting-based prediction models, earnings quality, accrual earnings management, real earnings management, bankruptcy risk

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Author Biography

Barbara Grabińska

Assistant Professor at the College of Economics and Finance, Krakow University of Economics, Department of Finance and Financial Policy. She received a PhD in economics from the Faculty of Finance, Krakow University of Economics. Her research interests include financing science and higher education, innovation policy, R&D, financial analysis and financial policy.

Konrad Grabinski

Associate Professor at the College of Economics and Finance, Krakow University of Economics, Department of Financial Accounting. He received a PhD in economics from the Faculty of Finance, Krakow University of Economics and completed his habilitation (dr hab.) in economics and finance at the same university. His research interests include earnings quality, earnings management, financial reporting, accounting diversity and corporate finance.

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