Cost stickiness, real earnings management and financial distress risk

This study examines the impact of cost stickiness (CS) and real earnings management (REM) on the financial distress risk of publicly traded companies listed on the Warsaw Stock Exchange (WSE) between 2014 and 2023. The extent of earnings manipulation through real activities was estimated using three aggregated REM proxies developed by Roychowdhury. Cost stickiness was analysed through the model proposed by Anderson et al., which establishes a linear relationship between changes in the natural logarithm of costs and simultaneous changes in the natural logarithm of sales revenue. To assess financial distress risk, the study employed the Altman Z″-score model, specifically adapted for emerging markets. Empirical analyses reveal a statistically significant positive relationship between REM intensity and financial distress risk in the examined sample. Additionally, the study underscores the strategic advantages of cost stickiness for financially stable firms, such as enhanced profitability stability and operational efficiency. Conversely, firms exhibiting lower levels of cost stickiness are more susceptible to financial distress, likely due to aggressive cost-cutting strategies that undermine financial stability. This study contributes to the literature on earnings management and cost behaviour by providing empirical evidence from an emerging market. Unlike prior research, it jointly examines the interplay between real earnings management and cost stickiness in the context of financial distress risk, offering novel insights into their combined impact on corporate financial stability.