Earnings management and the informational and disciplining role of debt: evidence from Iran
Journal of Asia Business Studies
ISSN: 1558-7894
Article publication date: 23 June 2020
Issue publication date: 23 June 2020
Abstract
Purpose
The agency theory predicts that there are conflict of interests between managers and shareholders over free cash flow and major operating decisions. Earnings management can help managers hide and retain their private benefits of control. Given that, the purpose of this study is to investigate whether financial leverage reduces agency and information problems caused by earnings management.
Design/methodology/approach
The research uses a sample of annual data of 200 firms listed on the Tehran Stock Exchange during 2002-2016. The data required is obtained from the Rahavard Novin database. The research uses multivariate regression models that regress financial leverage on earnings management proxies and other determinants of capital structure.
Findings
The research documents that firms with higher income smoothing and the absolute value of discretionary accruals, as the proxies for earnings management, have higher financial leverage. The results suggest that a higher level of financial leverage can discipline managers and generate useful information about firm quality.
Originality/value
The study highlights the informational and disciplining role of debt in the presence of severe uncertainty about firm quality in a developing country.
Keywords
Citation
Ghorbani, A. and Salehi, M. (2020), "Earnings management and the informational and disciplining role of debt: evidence from Iran", Journal of Asia Business Studies, Vol. 15 No. 1, pp. 72-87. https://doi.org/10.1108/JABS-11-2019-0336
Publisher
:Emerald Publishing Limited
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