Examining the Relationship Between Disclosure Level, Ownership Structure and Earning Management in the Tehran Stock Exchange

Abstract

Earnings are one of the basic elements of financial statements, which has always been of interest to different groups and it is used as a measure of continuity of activity, efficiency and revision of earnings contracts, predicting future cash flows for investment. Managers, to mislead shareholders on the actual economic performance of the firm, often manage earnings. Earnings management is a biased intervention on external financial reporting that is done to secure unusual earnings for shareholders or managers. Given the importance of earnings management in financial and accounting literature, in this study, we examine the effect of different internal and external mechanisms and disclosure level on earnings management. In this study, to estimate the model we have used the data of 143 firms listed on Tehran Stock Exchange, obtained by screening or systematic elimination over the 2005-2014 period. The results show that the impact of institutional ownership variable (as an external mechanism of corporate governance) on earnings management is positive and significant. The concentration of ownership (as an internal mechanism of corporate governance) on earnings management is positive and statistically significant. The impact of disclosure on earnings management is negative and significant. In addition, the results show that firm size is positively correlated with earnings management. The other two control variables, the ratio of market value to book value of equity and financial leverage have a negative impact on earnings management. Based on the results we suggest that institutional investors and major shareholders play a more active role in supervision and help to align the interests of shareholders and managers to decrease the agency problems and finally improve the firm's performance. Keywords: Disclosure, Earnings Management, Ownership Structure, Institutional Ownership, Herfindahl-Hirschman index INTRODUCTIONEarnings are one of the basic elements of financial statements, which has always been of interest to different groups and it is used as a measure of continuity of activity, efficiency and revision of earnings contracts, predicting future cash flows for investment. Managers, to mislead shareholders on the actual economic performance of the firm, often manage earnings. Earnings management, which is done through accounting's statistics manipulation or manipulation of actual activities, decrease the accuracy of its message and increase the risk and loss of confidence from outsiders and also will likely lead to information asymmetry and decrease investment efficiency. Earnings management not only hides the actual performance of a firm but also hides the real growth process, earnings and firms revenue that are used to predict future growth of the firm (McNichols and Stubben, 2008).