The Effect of Earnings Management and Financial Constraints on Financial Reporting Readability

Although firms are releasing good news about meeting a benchmark, they have incentives to hide the tools used to achieve it. In other words, when reported performance differs from underlying fundamentals, it is expected that managers try to make it harder for investors to identify such earnings management behavior and the underlying performance. The present study examines the effect of earnings management on readability of financial reporting of firms listed in Tehran Stock Exchange. The statistical population of the research is the firms listed in Tehran Stock Exchange during the period from 2011 to 2015 and the relationship has been investigated in 350 firms-years. The results of this study indicate that earnings management has a positive effect on the financial reporting readability Financial constraints has a positive effect on financial reporting readability. In addition, the control variables include firm's size and firm's age have a positive effect and agency costs and firm's growth have a negative effect on the financial reporting readability. While financial leverage and book value to market value have no effect on financial reporting readability.