Investigating the Relationship between Corporate Governance Ranking and Earnings Management in Companies Listed in Tehran Stock Exchange

Abstract

Joint stock companies play a major role in the economy and their success depends on willingness of investors and creditors to invest in these companies. Managers’ tendency to apply earnings management and abusing it which leads to providing false information can seriously destroy the trust of shareholders and cause thousands of shareholders to be harmed and run away from the stock market. Hence, due to the importance of keeping shareholders, the present paper seeks ways based on which financiers are assured that they will get good returns on their investment in the company. Shareholders play an essential role in the system of corporate governance, because they are the suppliers of companies’ capital and maintaining their trust is of utmost importance. Among the principles of corporate governance whose impact on earnings management is investigated by the present study, it can be pointed to institutional ownership of major shareholders and the ratio of non-executive directors to total directors. In this study, discretionary accruals using the modified Jones model has been applied as an index for determining earnings management. In this regard, the information of 98 companies during 20052011 has been used. To rate the mechanisms of corporate governance, TOPSIS ranking method which is one of the MCDM approaches has been used. After ranking, companies were divided into two groups including high-rank and low-rank companies. According to the results of this study, less earnings management is observed in companies with high rates of corporate governance; namely, the lower the rate of corporate governance is, the higher the earnings management will be. In the companies with high-rate corporate governance, due to the increased managerial control (earnings management) and transparency of financial information, the trust of shareholders and the amount of investment increase.