Investigating the mediating effect of earnings quality on the relationship between corporate governance characteristics and financial distress risk of companies listed on the Iraq Stock Exchange

Subject Areas : Accounting & Accountability

Amar Emad Khalaf Halboosh ¹ , Masood Fooladi ² , Zahid Qasim Badan ³ , Maryam Farhadi ⁴

1 - Ph.D. Candidate in Accounting, Department of Accounting, Is.C., Islamic Azad University, Isfahan, Iran
2 - Department of Accounting, Is.C., Islamic Azad University, Isfahan, Iran, [e-mail]
3 - Assistant Professor, Ph.D. of Economics Finance and Investment, Faculty of Management and Economics, Basra University, Basra, Iraq, [e-mail]
4 - Assistant Professor, Department of Accounting, Is.C., Islamic Azad University, Isfahan, Iran, [e-mail]

Received: 2025-03-27 Accepted : 2025-05-17 Published : 2025-06-03

Keywords: Corporate governance, earnings quality, financial distress risk, Iraq Stock Exchange,

Abstract :

Purpose: The risk of financial distress is one of the risks that the company must be careful to manage well and avoid actions that increase this risk. Corporate governance with appropriate supervision can improve the quality of earnings. On the other hand, high-quality earnings have sufficient information content and will also have a significant impact on reducing the risk of financial distress. Therefore, the aim of the present study is to examine the mediating effect of earnings quality on the relationship between corporate governance characteristics and financial distress risk.

Methodology: To achieve the research objectives, four hypotheses have been formulated. To test the first to third hypotheses, the multiple regression method has been used, and to test the fourth hypothesis, the method proposed by Baron and Kenny (1986) has been used. The study population includes a total of 133 companies listed on the Iraq Stock Exchange between 2013 and 2022. Among these companies, 41 companies were selected as a statistical sample using a systematic exclusion method and in accordance with the sampling conditions.

Findings: The results of the study show that corporate governance has a negative and significant effect on the risk of financial distress of the company. Also, corporate governance has a positive and significant effect on earnings quality. On the other hand, higher earnings quality significantly reduces the risk of financial distress of the company. Finally, the partial mediation role of earnings quality in the relationship between corporate governance and financial distress risk was confirmed.

Originality: By maintaining a balance between social, economic, individual, and collective goals, a corporate governance system encourages the efficient use of resources and requires corporate managers to be accountable for their stewardship of resources. Increasing the efficiency of the governance system leads to the efficient allocation of resources and ultimately economic growth and development, thereby preventing the risk of financial distress.

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