Real Earnings Management, Corporate Governance Quality and Credit Rating

NowadaysOwnersusescorporategovernancemechanismstoreducethe opportunistic behavior of managers and decrease credit rating level. Accordingly, the purpose of this article is to review the effect of real earnings management on the relationship between corporate governance quality and credit rating.

In this research,the data of the 144 firms listed in the Tehran stock exchange for the period of 2010to 2018 has been gathered and analyzed.To measure the credit rating we use Emerging Market Credit Scoring Model. Also, real earnings management measured by Roychowdhury model. Data obtained from Rahaward Novin software, firms financial statements and Codal system. Furthermore, to test the hypotheses of this research we utilized panel data approach and multiple regression model with GLS method.

The results show that the quality of corporate governance has a negative influence on the real earnings management; In other words, the higher quality of corporate governance decreases the opportunistic behavior of managers. In addition, the quality of corporate governance has a positive effect on credit rating but it is not statistically significant. Also results show that the real earnings management has significant and negative effect on credit rates. Finally, the results of the sobel test indicate that real earnings management has mediating effects on relationship between corporate governance quality and credit rates. Based on the results of research, the quality of corporate governance has indirect effect on credit rating through real earnings management. In other words, the quality of corporate governance through reducing opportunistic behavior of managers, leads to better credit rating.

From the negative effect of real earnings management on credit rates, we can conclude that the manager uses real activities earnings management for their impulses which will be detrimental to the stakeholders. So, when manager manipulates accounting earnings by real activities earnings management, the information asymmetry between managers and stakeholders increases hereupon systematic risk of companies increased. To preserve the interests of all stakeholders, corporate governance mechanisms are used. The corporate governance mechanisms can decline information asymmetry hereupon decrease systematic risk of companies. By applying strong corporate governance mechanisms, the opportunistic behavior of managers would reduce. Since real activities earnings management increase the risk of the corporation, with applying strong corporate governance mechanisms, opportunistic behavior of managers reduced and credit rating increased. With this regards, we can conclude that, when managers supervised by the strong corporate governance mechanisms, the opportunistic behavior of them decreases. Thus information provided had less bias. Eventually, this leads to the correct decision making by market participants.