Impact of Institutional Ownership and Board Independence on the Relationship Between Excess Free Cash Flow and Earnings Management

Subject Areas : Financial Economics

Allahkaram  Salehi ¹ (Department of Accounting, Masjed-Soleiman Branch, Islamic Azad University, Masjed-Soleiman, Iran)
Sajjad  Mohammadi ² (Department of Accounting, Khoramshar-Persian Gulf International Branch, Islamic Azad University, Khoramshar, Iran)
Marzieh  Afshari ³ (Department of Accounting, Khoramshar-Persian Gulf International Branch, Islamic Azad University, Khoramshar, Iran)

Received: 2017-06-11 Accepted : 2017-09-20 Published : 2017-09-01

Keywords: Earnings Management, Institutional Ownership, Board Independence, Excess Free Cash Flow,

Abstract :

However, the free cash flows scale is important for the financial health of the company, but it has also its own limitations. Moreover, it’s not immune from accounting tricks. Free cash flows can be considered as a measure of value for shareholders of listed companies on Tehran Stock Exchange. The managers of these companies have tended to use the earnings management for managing the free cash flow and ultimately shareholder value and wealth. The main objective of this study is to investigate the interactive effect of institutional ownership and board independence on the relationship between excess free cash flow and earnings management in the Tehran Stock Exchange. The study is applied and correlation research by its objective and nature. The variables used in this study have been extracted from the financial reports of listed companies in Tehran Stock Exchange and the web page of Tehran Stock Exchange in the period of 2009 to 2015. The results suggest that, "institutional ownership" and "board independence" on the relationship between "surplus free cash flow and earnings management" had no significant effect.

References:

[1] Ahmadpour, A., Montazeri H, Type of earnings management and the impact of company size and ownership structure on it. Shiraz University of developments in accounting, 2011, 3(2), P. 1 -35.

[2] Al-Dhamari, R. A., Ismail, K. N. I. B. K., Governance Structure, Surplus Free Cash Flow(SFCF), And Earning Quaility: Evidence from Malaysia. Journal of Modern Accounting and Auditing, 2013, 1(83), P. 8121-8189.

[3] Ang, J. S., Cole, R. A., Lin, W. J., Agency cost and ownership structure. Journal of Finance, 2000, 55(1), P. 81–106. 

[4] Baradaran Hasanzadeh, R., Badavar nahandi, Y. and Esmaili, S., The Effect of Ownership Structure on Auditing Quality. The Financial Accounting and Auditing Researches, 2014, 23(3), P. 99-115. (In Persian)

[5] Bhundia, A., A comparative study between free cash flows and earnings management. Business Intelligence Journal, 2012, 5(1), P. 123-129.

[6] Bushee, Brian. J., The Influence of Institutional Investors on Myopic R&D Investment Behavior. Journal Financial Economics, 1998, 86, P. 279–305.

[7] Chung, R., Firth, M., Kim, J. B., Earnings management، surplus free cash flow and external monitoring. Journal of Business Research, 2005, 58(6), P. 766-776.

[8] Dechow, P., Sloan, R., Sweeney, A., Detecting Earnings Management. Accounting Review, 1995, 70, P. 193 – 225.

[9] Jabbarzadeh Langarluie, S., Mohammad Salteh, H., Bayazidi, A., Moneskhah, G., The relationship between earnings management in group companies (integrated) with the output of the main corporate in Tehran Stock Exchange. Quarterly Stock Exchange, 2010, 11, P. 106-191.

[10] Jaggi, B., and Gul, A., Evidence of Accrual Management: A Test of the Free Cash Flows and Debt Monitoring Hypothesis, 2000, Working Paper, www.ssrn.com.

[11] Jones, J., Earnings management during import relief investigations. Journal of Accounting Research, 1991, 29(2), P. 193-228.

[12] Jones, S., Sharma, R., The Impact of Free Cash Flow, Financial Leverage and Accounting Regulation on Earnings Management in Australia’s ‘Old’ and ‘New’ Economies, Managerial Finance, 2001, 27(12), P. 18-39.

[13] Khodadadi, V., Rashidi Baghi, M., Ghorbani, R., Kaviani, M., Impact of Ownership Structure on the relationship between free cash flow and efficient utilization of assets, Research journal of asset management and financing, 2013, 1(1), P. 108-193

[14] Kohl, P. S., On the Association between Institutional Ownership and Aggressive Corporate Earnings Management in Australia, The British Accounting Review, 2003, 35, P.105–128.

[15] Lehn, K., Poulsen, A., Free Cash Flow and Stakeholder Gains in Going Private Transactions, The Journal of Finance, 1989, 44(3), P. 771–787.

[16] Leuz, C., Dhananjay, N., Management: An international comparison., Peter, W., Investor protection and earnings, Journal of Financial Economics, 2003, 69, P. 505-527.

[17] Mehrani, S., & Bagheri, B., The effect of free cash flow and institutional shareholders on earnings management in listed companies in Tehran Stock Exchange, Journal of Accounting Research, 2009, 1(2), P. 50- 71.

[18] Moradzade Fard, M., Gheytasi, R., Masjet Mousavi, S., The study of the relationship between corporate free cash flow and shareholder free cash flow with stock market value of companies listed in Tehran Stock Exchange, Journal of Financial Studies, Islamic Azad University, Science and Research Branch of Tehran, 2015, 7, P. 1 -18.

[19] Moradzade fard, M., Zarezade Mehrizi, M. S., Taker, R., The impact of board of director's Bonus and institutional ownership on earnings management in companies listed in Tehran Stock Exchange, Quarterly Stock Exchange, 2012, 18, P. 137- 152.

[20] Nekhili, M., Amer, I., Chtioui, T., Lakhal, F., Free cash flow and earnings management: the moderating role of governance and ownership, 2015, Available at www.ssrn.com.

[21] Nikoumaram, H. & Mohammadzede Salteh, H., A model to explain the relationship between corporate governance and earnings quality, Journal of Managerial Accounting, 2010, 3(4), P. 80-85.

[22] Park, Y. W., Shin, H. H., Board composition and earnings management in Canada, Journal of Corporate Finance, 2004, 10(3), P. 431-457.

[23] Setayesh, M.H., and Salehinia, M., Impact of Ownership Structure and Capital Structure on free cash flows, Research in financial accounting and auditing, 2015, 7(25), P. 15-32.

[24] Sadeghzadeh Fasfandiqghi, A.Salar, Aghaie., II Study of the effect of Excess free cash on the quality of corporate profits. Third International Conference on Management, Economics and Accounting, Tabriz, East Azerbaijan agency of industrial Management organization, 2015.

[25] Takiah, M., Iskandar, R., Br Bukit., Zuraidah, M. S., The Moderating Effect of Ownership Structure on the Relationship Between Free Cash Flow and Asset Utilization, 2012.

[26] Yudianti, N., The Effect of Investment Opportunity Set and Earnings Management to the Relationship between Free Cash Flow and Shareholder Value, Journal of Business Research, 2008, 12, P. 193-228.

[27] Zabihi, A., and Asghari, M., The relationship between free cash flow, corporate governance and company size with the ability to predict profit. Fourth National Conference of modern management, 2015.

[28] Zerni, M. K., and Nilsson, H., The entrenchment problem, corporate governance mechanisms, and firm value, Contemporary Accounting Research, 2010, 27(4), P. 1169 - 1206.

[29] Watts, R. L., and Zimmerman, J. L., Agency problems, auditing, and the theory of the firm: some evidence. Journal of Law and Economy, 1983, 26, P. 613–633.