Relationship between earnings management, CEO compensation, and stock return on Tehran Stock Exchange

Abstract

Purpose The purpose of this paper is to investigate the relationship between earnings management and chief executive officers’ (CEOs) compensation. Owing to the fact that earnings management does not have only opportunistic effects, but signaling effects, this study focuses on accruals quality to examine earnings management incentives. Thus, accruals quality is described against future cash flow. The empirical evidences suggest that a positive relationship between discretionary accruals and future cash flow provides predictive elements for earnings management, whereas a negative relationship between discretionary accruals and future cash implies to opportunistic elements for earnings management. Should there is no significant relationship between discretionary accruals and future cash flow, there will be no earnings management, and such a result suggests that incentives and managers’ performance in these firms differ. Design/methodology/approach The statistical population of this research consists of all listed companies on the Tehran Stock Exchange during 2009–2016. Panel data method is applied in order to estimate the research model. Findings Findings of the study show that there is no significant relationship between discretionary accruals and future cash flow in pharmaceutical and food industries, thus they have neither predictive nor opportunist earnings management, while the results evidence a negative significant relationship between discretionary accruals and future cash flow in machineries, automobile, mineral and chemical industries. Furthermore, it can be alleged that there is no significant difference between CEOs’ compensation in firms with opportunistic earnings management (OEM) and other types of earnings management. It shows that firms do not have appropriate plans for CEOs’ compensation. Moreover, the relationship between earnings management and stock return has been investigated in this study. We document that stock return is influenced by accruals quality and its components. In other words, stock return significantly differs in firms with OEM and firms without any kind of earnings management. Research limitations/implications The authors’ findings provide contributions; for managers, it is noticeable that stock markets have sufficient comprehension about financial statements and the undertaken procedures on them, resulting in a higher return base on fair information. For investors and regulators, using the findings, may have deeper understanding to distinguish between industries that are recognized as opportunistic and non-opportunistic, which, in turn, results in better decision and regulation. Originality/value Previous studies have been mostly investigated OEM, while the current study examines both signaling and opportunistic aspects of earnings management.

The Effect of Earnings Management to Stock Return on Company Listed in Indonesia

“…Results of the study are supported by other studies with the same variables that Farichah (2017), Moardi et al (2019), andBhutto et al (2021) in which the results of the research shows that there is a significantly relationship between earnings management with stock return. However, this research is different from the research conducted by Saedi (2018), Omush et al (2019) dan Adiwibowo (2018) where the results of the research show that there is a significant relationship between earnings management with stock return.…”

“…Return on asset is calculated by way of divide the net profits to total assets multiplied by 100%. Book to market ratio (BM) is the proportion of book value to market statistics on shareholder equity (Moardi, Salehi, Poursasan, & Molavi, 2019). The book to market ratio is measured using a ratio measurement scale.…”

The Effect of Management Characteristics on Audit Report Readability

“…Seifzadeh et al (2021) declare a significant relationship between real and accrual-based earnings management and financial statement comparability. Moardi et al (2019) perceive that opportunistic earnings management is negatively and significantly associated with future cash flows and shows no significant relationship between accrual-based earnings management and future cash flows in the pharmaceutical industry. Such a relationship is negative and influential in the car industry.…”

Earnings quality and firm valuation: evidence from several European countries

“…As Dechow et al (2010, p. 344) mention, scholars have used numerous proxies such as “ persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness and external indicators such as restatements and SEC enforcement releases. ” These attributes of EQ have been rigorously studied with regard to the consequences of governance at micro and macro level (namely, as corporate governance and country-level governance) (Agnes Cheng et al , 2007; Chiang et al , 2017; Gaio and Raposo, 2014; Harymawan and Nowland, 2016; Jiang et al , 2008; Islam et al , 2022; Lobanova et al , 2019; Machuga and Teitel, 2009; Rezaee and Safarzadeh, 2023; Salehi et al , 2018; Salehi et al , 2020; Seifzadeh et al , 2021; Thesing and Velte, 2021), International Financial Reporting Standards (IFRS) adoption (Ho et al , 2015; Houqe et al , 2012, 2016; Ismail et al , 2013; Kabir et al , 2010; Krishnan and Zhang, 2019; Liu and Sun, 2015; Sun et al , 2011), audit quality (Chen et al , 2018; Huang et al , 2016; Lambert et al , 2017; Lennox et al , 2016), organizational outcome (Charitou et al , 2011; Elsiddig Ahmed, 2020; Elzahaby, 2021; Fonou-Dombeu et al , 2022; Francis et al , 2008; Gaio and Raposo, 2011; Ma and Ma, 2017; Mensah and Onumah, 2023; Moardi et al , 2020; Nguyen et al , 2022; Saleh et al , 2020), and CSR (Bozzolan et al , 2015; Brahem et al , 2022; Choi et al , 2013; Dang and Pham, 2022; Jacobsen, 2013; Kim et al , 2012; Mohmed et al , 2019; Muttakin et al , 2015; Rezaee et al , 2020).…”