Revisiting corporate governance mechanisms and real earnings management activities in emerging economies

Abstract

Purpose

This study aims to investigate the effects of main corporate governance (CG) mechanisms used in Iran on the relationship between managers’ rewards and real earnings management activities.

Design/methodology/approach

Panel data analysis is performed on 101 companies listed on the Tehran Stock Exchange during the past seven years (from 2015 to 2021).

Findings

The percentage of non-executive members of the company’s board of directors and the percentage of acquisition of the company’s largest shareholders have a negative significant effect on the relationship between abnormal operating cash flows and managers’ remuneration. Moreover, the separation of the CEO from the chairman and vice chairman of the board has also a negative significant effect on this relationship. However, concentration of ownership does not have a significant effect on the relationship between abnormal operating cash flows and managers’ rewards.

Practical implications

The study provides policymakers and governing bodies with a better understanding of the effects of the percentage of non-executive board members, concentration of ownership, percentage of major shareholders and duality of the role of CEO (or president) from the chairman and vice chairman of the board on the relationship between managers’ rewards and earnings management.

Originality/value

Previous studies focus mainly on accrual-based earnings management. This study investigates real earnings management and provides empirical evidence on the most effective and significant CG dimensions in Iran. It embraces the fact that CG may have the same principal concept in different markets, but the mechanisms may vary significantly, thus opening the door for more comparative future research.