Enhancing Financial Stability: The Contribution of Earnings Quality in Iraqi Industrial Companies to Mitigate Financial Distress

Abstract

Typically, the quality of earnings significantly influences a company's overall performance. Existing literature suggests that earnings quality can potentially enhance a company's access to creditors and investors, thereby improving its financial performance, even though empirical evidence on this matter is scarce. This study utilizes data from companies listed on the Iraq Stock Exchange (ISE) to investigate whether earnings quality (QoE) can act as a safeguard against financial failure. According to the research findings, the quality of accruals, representing changes in cash flows from operational activities, exerts an adverse impact on the Z value. This suggests that corporate entities face a decrease in their Z value when they struggle to manage accruals from their operational activities effectively. Additionally, the persistence of earnings can impede a company's financial performance, leading to a decline in the Z value. In many cases, companies fail to generate expected earnings or financial accruals, and there is a lack of predictability in their earnings that could help improve their financial performance and reverse the downward trend. Furthermore, the study's results reveal that the surveyed Iraqi firms are either currently experiencing financial difficulties or heading in that direction. This underscores the need for proactive measures to address issues related to their product offerings, closely scrutinize operational processes, and focus on increasing cash flows. These actions collectively play a pivotal role in achieving success and averting financial failure.