Purpose This study aims to explore the moderating role of institutional ownership in the impact of auditor industry specialization and the cost of equity on earnings management in Tehran Stock Exchange. Design/methodology/approach A total number of 198 firms were assessed in this study from 2014 to 2021. In this study, both accrual earning management (AEM) and real earnings management (REM) have been included. The industry-adjusted earnings price ratio and Gordon Growth Model were used for the cost of equity capital. In addition, auditor’s within-industry market share was used as a proxy for auditor industry specialization. Findings The results showed that institutional ownership positively moderates the impact of auditor industry specialization on AEM/REM. Furthermore, institutional ownership positively moderates the impact of cost of equity on AEM/REM. Hypothesis testing based on a robust regression and t + 1 test were also used for the results. Originality/value Previous studies have reported mixed results of this empirical question whether institutional ownership actually monitors managers and control earning management, considering the auditor industry specialization and the cost of equity. To the best of authors’ knowledge, this is a pioneering study to fill the existing gap. This study would not only benefit companies to manage financial and strategic decisions more efficiently but also help national and international society apply effective mechanisms to assist companies in decreasing earning management and increasing the firm performance, and try to push the market into a favorable direction.