From Financial Distress to Firm Value: The Mediating Role of Earnings Management and the Moderating Role of Audit Quality in Indonesian Listed Companies

Harlen Silalahi

Authors

Harlen Silalahi Universitas Mandiri Bina Prestasi

Keywords:

Audit Quality; Earnings Management; Financial Distress; Firm Value; Indonesia Stock Exchange

Abstract

This study examines how financial distress affects firm value through earnings management and whether audit quality conditions this transmission process among non-financial companies listed on the Indonesia Stock Exchange during 2020–2025. Using an unbalanced panel of 423 firms and 2,371 firm-year observations, the study applies two-way fixed-effects regressions with firm-clustered standard errors, the Modified Jones model to estimate discretionary accruals, the emerging-market Altman Z'' score to measure financial distress, Tobin's Q to capture firm value, and Big Four affiliation as the proxy for audit quality. The results show that financial distress significantly increases earnings management and directly reduces firm value, while greater earnings-management intensity is associated with lower firm value. Audit quality weakens the positive effect of financial distress on earnings management and attenuates the negative valuation consequence of earnings management. Bootstrap analysis further indicates that earnings management significantly mediates the financial distress–firm value relationship and that this indirect effect is substantially weaker among firms audited by Big Four-affiliated auditors. Robustness tests using alternative measures and lagged specifications preserve the direction and significance of the principal findings. These results demonstrate that financial distress affects market valuation through both a fundamental channel and an informational channel arising from managerial reporting behavior. The study contributes by integrating financial distress, earnings management, audit quality, and firm value within a conditional-process framework and offers implications for investors, auditors, corporate managers, and regulators seeking to strengthen reporting credibility and market discipline in emerging capital markets. These implications matter under elevated financial pressure and information risk.

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