Moral Hazard and Earnings Management

Abstract

One of the most controversial topics in accounting research is earnings management. Accounting profit consists of cash and accrual. Benefit accruals are largely in control of management. On the other hand, one of the consequences of capital market development is the separation of ownership from company’s management that may result in several representative problems such as moral hazard that, in turn, may cause the manager leave the representative contract ineffective to follow his own benefit. Hence, it is expected that the firms with high level of moral hazard have high earnings management level. This study aims to examine the relationship between moral hazard and earnings management in the companies listed in the Tehran Stock Exchange in the period 2006-2011. The research hypothesis was tested by linear and non-linear partial least squares method, using structural equations model. The results indicated that there is a positive relationship between moral hazard and earnings management, and that such a relationship could be explained better by linear model.

Keywords

• agency theory
• moral hazard
• earnings management