Citation
(2010), "Free cash flows, financial leverage and earnings management: the case of Iran", International Journal of Accounting & Information Management, Vol. 18 No. 1. https://doi.org/10.1108/ijaim.2010.36618aad.013
Publisher
:Emerald Group Publishing Limited
Copyright © 2010, Emerald Group Publishing Limited
Free cash flows, financial leverage and earnings management: the case of Iran
Article Type: AMIS statement and abstracts From: International Journal of Accounting and Information Management, Volume 18, Issue 1
Abstract
The theoretical basis of many researches in the field of the relation between earnings management and free cash flows (FCF) is the Jensen Theory. In the Jensen's viewpoint, the managers of the firms with high FCF and low growth probably manage the earnings in order to get some self-interest in the short time. In addition, the Jensen's control hypothesis predicts that the financial leverage can adjust that relation for two reasons. First, required debt repayments reduce the cash available to management for non-optimal spending. Second, when a firm employs debt financing, it must undergo the security of lenders and is often subject to lender-induced spending restrictions. This research is the first one in Iran, which examines the Jensen theory. By using the information of 90 sample firms and by applying the multivariable linear regression model during the years 2000-2004, we conclude that there is a direct and significant relation between earnings management and FCF in the low growth firms. However, we do not find any significant relation between earnings management and financial leverage in the firms with high FCF and low growth. It seems that this result is due to existence of governmental structure in the most Iranian companies. In these firms, managers are not under any obligation to repay the principal and interest of received debts, so without any effective limitation by creditors, they invest FCF in their favorite projects instead of repayment of debts.
Keywords Earnings management, Financial leverage, Free cash flows, Firm growth
Bita Mashayekhi and Behrooz Bagheri
University of Tehran, Tehran, Iran, and
Arash Tahriri
Alameh Tabatabaee University, Tehran, Iran
Corresponding author
Bita Mashayekhi can be contacted at: bitamashayekhi@gmail.com; mashaykhi@ut.ac.ir