Investigation of Relationship between Earnings Management and Investment Inefficiency with the Emphasis on the Role of Agency Costs

One of the earnings management consequences is investment inefficiency (over or under-investment) in companies. Also, it is expected that this issue will increase in companies with high agency costs. The objective of this study is to investigate the relationship between earnings management and investments inefficiency in companies with high and low agency costs listed in the Tehran Stock Exchange. In order to test this, the hypothesis on a sample of 98 companies from 1386 till 1396 and using multivariate regression models were tested. For this purpose, the residual cash flow pattern Jensen (1986) and cash flow developed pattern Richardson (2006) was used to calculate the investment inefficiency. The positive and negative residuals will represent over investments and under investments, respectively and in this study is used as a proxy for investment inefficiency. Also, discretionary revenues and discretionary accruals as a proxy for earnings management were considered. The results show that there is a significant negative relationship between discretionary accruals and inefficient investment in firms with high agency costs. Also, results using a residual cash flow pattern Jensen (1986) as a proxy for investment inefficiency indicated a significant negative relationship between discretionary revenues and inefficient investment in firms with low agency costs.