Earnings Management and Ownership Structure: Some Evidences from Companies listed in Tehran Securities Exchange

According to the agency theory, there exists a conflict of interests between managers and stockholders since their objectives are not necessarily in line. To manage earnings through accounting accrual is an example of managers’ deviation from interests of stockholders which could undermine the credibility of financial reports and thereby, jeopardize the interests of stockholders and even disrupt the securities market. The ownership structure can, on the one hand, create incentives to earnings management and, on the other hand, limit it. In this article, it has been attempted to answer the question that whether any difference in the ownership structure or, in any sense of the word, ownership concentration leads to a change in earnings management. To this end, through empirical method and regression model, we have investigated the relationship between ownership concentration and earnings management in some companies registered in Tehran Stock Exchange during the years 2011 and 2012.Our study shows a meaningful and non-linear relationship between earnings management and some criteria of ownership concentration. Most important findings of our study, that could have a great impact on policymaking, suggest a non-linear relation between the percentage of free float shares of a company and the discretionary accruals of that company which could be diagramed as the English letter U upside down. Namely, first, an increase in the percentage of free float shares of a company raises the discretionary accruals. Then, as the free float shares exceeds the maximum level, further increase in this variable would result in a decrease in discretionary accruals. This is the issue that should theoretically be explained.