Investigating the relationship between financial distress and business unit performance with earning management decisions using simultaneous equations

Document Type : Original Article


1 Islamic Azad University, Ahvaz Branch, Iran

2 Islamic Azad University, Gachsaran Branch, Iran


According to agency theory and transaction cost theory, managers use every opportunity to pursue personal interests, and this does not necessarily serve the interests of shareholders; Therefore, it is possible for managers to manage earnings to conceal this wealth transfer. On the other hand, the performance and financial health of the company are among the indicators that shareholders and users of financial statements pay special attention to, and managers also make relevant earning decisions based on the performance and financial condition of the business unit based on specific motivations. The purpose of this study is to investigate the relationship between business unit performance and financial distress with earning management decisions in companies listed on the Tehran Stock Exchange. The sample includes 88 companies listed on the Tehran Stock Exchange and the period under review is from 2013 to 2018. To test the research hypotheses, combined data and multivariate regression, simultaneous equations and comparison of means were used. The results show that there is a negative and significant relationship between business unit performance and earning management decisions. On the other hand, the findings confirm the positive and reciprocal relationship between financial distress and earning management. It was also found that, the average earning management is higher in loss-making companies.


Main Subjects

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