Analysis of agency conflict with emphasis on aspects of earnings management, audit quality and cost of equity; Game theory approach

Zahra Moghaddam ¹ (Ph.D. student of accounting, Urmia University, Urmia, Iran, E-mail: [e-mail])
Hamzeh Didar ² (Associate Professor, Department of Accounting, Urmia University, Urmia, Iran (corresponding author), E-mail: [e-mail])
Kiumars Shahbazi ³ (Professor, Department of Economic Sciences, Urmia University, Urmia, Iran, E-mail: [e-mail])
Ali Ebadian ⁴ (Professor, Department of Mathematics, Urmia University, Urmia, Iran, E-mail: [e-mail])

Submited date : 2023-08-08 accepted date : 2024-02-01

Keywords: Audit Quality, Game Theory, M41, Nash equilibrium, M42, Aspects of Earnings Management, Cost of Equity.JEL Classification: A12,

Abstract :

The purpose of this article is to describe and explain the strategic behavior of managers and shareholders in the interactive-conflict environment of joint-stock firms using the tools of game theory and in the form of signaling games. In such a way that first, taking into account the level of quality of internal controls, the manager acts on (deceptive and informative earning management) and then the shareholder with strategies (high capital cost, low capital cost) and also (high-quality audit services, low-quality audit services) reacts to it. The findings of the research, theoretically, the necessary conditions for establishing balance in the strategies (deceptive earning management, high capital cost), (deceptive earning management, high-quality audit services) in the environment of weak internal controls. In addition, it shows the condition of establishing equilibrium in the strategies (informative earning management, low capital cost), (informative earning management, low-quality audit services) in the environment of strong internal controls..