Investigating the effect of free cash flow, dividend and financial leverage on earnings management in listed companies in Tehran Stock Exchange

Transcription

1 Investigating the effect of free cash flow, dividend and financial leverage on earnings management in listed companies in Tehran Stock Exchange M.Barkhordar Accounting Postgraduate, Islamic Azad University of International Kish branch, Kish, Iran Dr.R.Tehrani Associate Professor of Financial Management, Faculty of Management, Tehran University, Tehran, Iran Abstract Today earnings management is one of the attractive topics discussed in many accounting researches. Because the investors pay special attention to the earnings figure as one of the most important factors of decision making, on the other hands, the conducted researches on earnings management show. Earnings management is a method which is used by management in order to manipulate data. Predicted and estimated variables would be examined from two different aspects in order to examine the impact of free cash flow, dividends, financial leverage on earnings management in companies accepted in Tehran Stock Exchange. On the one hand, these variables would be tested among different companies, and on the other hand, they would be tested in the period Regarding to the limitations, 89 companies would be selected and tested; the research results indicate the direct and significant impact of free cash flow, dividends, financial leverage on earnings management. Keyword: earnings management, free cash flow, dividends, financial leverage. Page 124

2 Introduction Net earnings are one of the items provided by the accounting system which is used by users inside and outside the organization in order to make economic decisions. The importance of accounting earnings for the users of financial information has led the commercial unit management pay a special attention to the amount and how to prepare and present it.one of the important aspects of accounting earnings is its role in financing contracts. Debts in addition to being one of the motivating factors for earnings management could reduce fluctuations in commercial unit interest and therefore leads to reduce earnings management through opportunistic behavior by managers (Hashemi et al., 2010). The impact of financial leverage on firm value is one of the most controversial and the most challenging issues of financial management. Managers are trying to maximize the firm value by choosing the proper combination of different sources of financing. Debt is one of the most important sources of financing on companies. The increase in debt is one of the ways to achieve these goals (Hashemi et al. 2010). On the other hand, high levels of free cash flow despite financial leverage, is the encouraging factor in performing opportunistic behavior by managers. Jensen (1986) states that free cash flow have a great impact on the opportunistic behavior of managers. In a situation where a company has a large amount of free cash flow, manager can invest surplus funds in various opportunities. Due to limited reliable and high-returns investment opportunities, managers will likely do some investments which have fewer returns than the cost of company's capital, or are very hazardous. The cost which imposed to shareholders in this situation is called "agency costs from free cash flow", in term when the company is faced with high amounts of free cash flow; the managers' opportunistic behavior would be also increased. Increased financial leverage would reduce gradually this amount of cash flow and therefore the level of managers' authorities in how to use the company cash. Regarding to these contents, this can lead to reduction of earnings management. In this study, we will pursue this question that how is the impact of free cash flows, dividends and financial leverage on earnings management in companies accepted in Tehran Stock Exchange. Undoubtedly, investigating this issue can help considerably to enrich this field of literature more and also present a guide for the project and companies involved in this field? The theoretical and annals research Earnings management is one of the attractive topics discussed in many accounting researches. Because the investors pay special attention to the earnings figure as one of the most important factors of decision making, on the other hands, the conducted researches on earnings management show. Earnings management is a method which is used by management in order to manipulate data. For example, evening earnings to make investors more assure about the sustainability of earnings is considered an example of data manipulation. These acts may influence data existing in the financial statements significantly. There are several ways in which the registered office can be used to manage earnings. Page 125

3 Illegal registrations are often used in order to cover up the financial abuses in accounting offices; in other cases, records are used as a tool to manage earnings. The company management when applying earnings management clearly knows that the objective of this work is maintenance of company's interests against the owners' earnings. Even in other cases, earnings' management is for obtaining reward dedicated to the managers due to more preservation of company against the owners' earnings (Nurosh et al. 2005). Earnings' measurement process and its result play a significant role in the management of the company, and users of financial statements pay usually great importance to it. Since the commercial enterprise earnings' calculation is accounting estimation method, and the preparation of financial statements is the responsibility of the commercial unit's management, management may do earnings' management due to several reasons (Valizadeh Larijani, 2008). - Various hypotheses about earnings management Different hypotheses and theories have been used in existing literature to explain the earnings management by managers, and its consequences: 1) Mechanistic Hypothesis, 2) Efficient market Hypothesis, and 3) Positive Theory (Dastgir and Hosseini, 2013) 1. Mechanical hypothesis This hypothesis which was proposed in the 1960s indicates that accounting information is the exclusive source of information, and there is no substitute for accounting reports, if there is, they would not be used. So users of financial statements use only the financial reports of company, and investors make decisions merely based on apparent values reflected in the financial information of companies. According to this hypothesis, investors can be systematically misled by accounting options and methods. In fact the basis of this hypothesis has been put on market inefficiency. 2. Efficient Market Hypothesis The efficient market hypothesis indicates that market prices fully reflect all available information. It is said in semi-strong form of efficient market hypothesis that market can identify the effect of artificial accounting changes (earnings management). Therefore, management cannot systematically mislead the market by these kinds of changes. There are many studies in which mechanical and efficient market hypotheses were used, but researchers have failed to confirm the prediction of each. In addition, the mechanical hypothesis as well as the efficient market hypothesis has been criticized due to the simplicity of the principles on which they are based. 3. Positive Hypothesis Positive theory poses incentives other than incentives related to capital market to explain earnings management by managers. For this purpose, the positive theory does not violate previous hypothesis, but instead, emphasizes on internal contractual incentives and agency theory to use different accounting options. Page 126

4 According to the positive theory of accounting, since accounting variables provide a basis for decision making related to resource allocation, management services compensation, avoidance from violating debt contracts, management can manage earnings through estimating and selecting accounting procedures, and affect the results and consequences of this decision. Thus, positive theory leads the direction of earnings management researches from capital market-based incentives' test towards internal contractual reasons of the company and agency theory for the earnings management. Research conducted in the country Baradaran and Kamranzadeh (2009) in a paper titled "Investigation of earnings management in companies accepted in Tehran Stock Exchange" stated that separating management from ownership in joint stock companies has been caused management exclusive access to the financial information. Managers to achieve the expected earnings may follow this goal through increasing discretionary accruals, because manipulating operating cash and non-discretionary accruals is almost impossible. The results showed there is a reverse significant relationship between discretionary accruals and cash achieved by operations. These strong inverse relationship between discretionary accruals and operating cash show the company managers have increased discretionary accruals with the aim of achieving their expected earnings when operating cash is reduced, and they reduced the discretionary accruals when the operating cash is increased, or in the other word, they have managed earnings. Hashemi and Kamali (2010) in a research investigated the impact of gradual increasing financial leverage, the amount of free cash flow and company's growth on earnings management of companies accepted in Tehran's Stock Exchange. Results of hypotheses' test show that the level of earnings management in companies that always have high financial leverage has no significant difference with the companies that involved gradually in increasing the financial leverage. Other results of the research show that the free cash flow and company's growth are effective factors in the amount of opportunistic behavior of manager which had influenced the level of earnings management. Sahafi Esfandabadi (2010) conducted a research on the relationship between financial leverage and variety of investments with increasing earnings management of companies accepted in Tehran Stock Exchange. He concluded that the variety of investment has an indirect impact on earnings management through financial leverage and influence the relationship between financial leverage and earnings management. With the increased variety of investments, and consequently increased asymmetry of information, cost of company's control and observance is increased due to the request of the audit report. Saidi et al (2012) in an article examined the relationship between real earnings management activities and future performance of companies accepted in Tehran's Stock Exchange. The results show that there is an inverse and significant relationship between criteria of real earnings Page 127

5 management and future performance. In other words, it can be deduced from these results that manipulate the real activities in the current period reduces the company's future performance. Researchers conducted abroad: Jaggi, and Gul (2000) in their study found a direct relationship between earnings management and high free cash flows in companies with low growth. They believe according to Jensen's theory managers in such companies rather to distribute free cash flow among shareholders; they invest the mentioned funds in projects with negative net current value, which causes a drop in the company's market value. Therefore managers of such companies try to adjust the existing situation using discretionary accruals increased earnings, and achieve some of their personal interests. Yoon and Miller (2002) investigated earnings management in 249 Korean companies and concluded that Earnings management in examined companies is carried out using discretionary accruals. This act is especially performed when cash obtained by operation indicates the company's performance in companies mentioned in this research. It is stated in this research that market reacts positively to net earnings' changes, but this reaction is negative about accruals' changes. Jelinek (2007) conducted a research on "impact of increased financial leverage on earnings management" on 246 companies during the years of 1992 to He used financial leverage, free cash flow and growth companies as independent variables in this stud, and tested their impact on earnings management. The results showed a significant difference between earnings management in the companies which faced gradually over a period of 5 years with an increase in financial leverage compared to those which had always had a high degree of leverage during the same period. Chi and Gupta (2009) while investigating the relationship between over stock valuation and earnings, they realized the relationship between over stock valuation and increasing earnings management economically and statistically in the next period. The findings of Badraschrniz who has investigated the relationship between over valuation and selecting alternative structure of earnings management, which indicates a positive relationship between stock valuation and earnings management. Norhayati Abdul Rahman, Isaac (2013) examine the impact of financial leverage on real earnings management. The findings show that there is a significant negative relationship between leverage and real earnings management and strong companies would have lower levels of real earnings management. Therefore, financial leverage influences earnings' quality. Research hypotheses Mashayekhi and colleagues (2010) under the assumption that the purpose of managers of profit management in companies with high free cash flow and low growth is likely to achieve some personal gain in a short time. In addition, Jensen (1986) financial leverage predictive controls theory, to be used for two reasons: First, cash available to management, reduce debts repayment Page 128

6 of undesirable costs required. Secondly, when a company is financing, should be tolerate guarantee of the lenders, which are created often as constraint of cost-lender. Thus, according to the above-mentioned studies conducted and contents, the first hypothesis that arises to meet the research's question is as follows: First hypothesis: companies with high levels of free cash flow have a significant impact on earnings management. Dividends can claim to distribute profits to shareholders of a company. Also strategy of paying cash has been listed for public that is looking for return of cash or assets to their shareholders (Jensen, 1986). Dividend is able to disperse the free cash flow. However, when need to dividends to be limited the companies are close to contract of debt. In this case, managers may be tempted to manipulate earnings and to maintain increase dividend (Farynhav Moreira 1, 2007). According to Syed Zulfiqar et al. (2010), dividend can be used as a feature to predict income and on the other hand can be as a predictor of dividend. They also stated that the dividend can be considered as a way to reduce the problem (i.e. earnings management) of company, if the company be reducing its shareholder dividend. So with respect to the above mentioned other hypothesis of research is as this terms: Second hypothesis: companies with a high level of dividend payments have a significant impact on earnings management. Nor Balkish et al (2013) stated that according to Irina 1 (2009), companies with high leverage, may be at risk of bankruptcy in case that unable to pay its debts in the face of external financing. In some previous literature has been stated about the relevance of leverage with earnings management that impact of leverage avoids on earnings management from increase in debt. based on evidence that managers choose accounting methods that may reduce of company debt covenant violation (Dychv, Skinner 2, 2002), (Beatty and Weber 3, 2003). And also, according to Sweeney 4 (1994), providing direct evidence to support the assumption of debt that more debt of a company to equity ratio, there is a high probability that the company manager to choose accounting methods to increase profits. Thus, according to studies conducted and contents mentioned above to finding the answer of third hypothesis of research question, we are state as follows: Third hypothesis: companies with high levels of financial leverage have significant impact on earnings management. Research methodology The methodology used in this study is correlational research from the variety of descriptive researches (in descriptive research from correlational type, researcher investigate the relationship between two or more variables). This method of reasoning research is deductive, inductive. Deductive because the path of the library, articles and Internet has been used for theoretical Page 129

7 framework and research background and inductive because the collect data from the primary data path have been carried out to accept or reject the hypotheses. In this study, the method of "data panel" is used according to data type and methods of statistical analysis available. Because to evaluate the effect of free cash flow, dividend, financial leverage on earnings management in listed companies in Tehran Stock Exchange, the predictor and estimated variables to be discussed from two different aspects. On the one hand, these variables are tested among different companies and on the other hand, during the time period of Population and statistical sample of research According to the goal of research by considering the possibility of collect homogeneity information of all members of population and lack of any source of information reliable on access to financial information of companies out of the Stock Exchange, statistical population of this research includes all companies listed on the Stock Exchange in Tehran. Study's time period has been considered from 2004 to After applying conditions to select our statistical sample companies, including all companies listed in Tehran Stock Exchange and companies that their information is not enough, it is deleted from our statistical sample and total of 89 companies were selected as sample that data and their financial information to be used in the analysis conducted. Research variables and models Dependent variable Earnings management: an important factor that to be used in testing earnings management of companies, and applying point of view of managers in profit units in determining earning. Jones difference between earnings and cash flows obtained from operations has identified as accrual anomaly. Prevailing thought is of this opinion that existing information in cash from operations is more objective criteria to assess the actual economic performance of profit unit and hence it can lower be managed. (Mashayekhi et al., 2005) In the first stage of the relationship between total accrual anomalies for a specific time period that is known to period of event by sale variables, property of Machinery and equipment are met as follows: TAit / Ait-1 = β 1 (1 / Ait-1) + β 2 (ΔREVit / Ait-1) + β 3 (PPEit / Ait-1) + εit (1) In this regard: TA it : reagent of total accrual anomaly the company of i in year of t A: total of assets REV: total of sales revenue Page 130

8 PPE: is impure property, equipment and machinery. ε: component of forecasting and residual error from regression accrual anomaly is optional. Independent variables A. Free cash flow Len and Poulsen (1989) know the measurement of free cash flow as income factor before costs minus depreciation such as tax costs, interest cost and dividend. In this study free cash flow (FCF) is the ratio of free cash flow on total assets (in the company of i and in the year of t). Free cash flow = (Every year, free cash flow per year)/ (Total assets of the same Year) B. Dividend According to Nor Balkish et al (2013) with respect to the fact that dividend initially by Zunaidah, Fauzias (2008), was measured in the form of dividend to price ratio (dividend yield) Therefore, the dividend yield is dividend per share division by the final price of market per share. Also Ascoli and Barney (1994) assume that instead the ratio of payment has been used of the dividend yield (dividend to income). Two reasons: In the first phase, in the denominator of measure criterion dividend yield of market (share price) in comparison with measurement of payout ratio (net income), In the second stage, to avoid the problems of negative payout ratio caused by negative profits or due to excessively high payout ratio arising from became close of income to zero. This led that in this research, dividends be calculated from dividend per share (DPS) on the market final price per share (MPS) in the year of t Dividend = (dividend) / (market share price) C. financial leverage There are different opinions on whether increase or decrease financial leverage has impact on earnings management potentially. According to Nor Balkish et al (2013) some articles, such as Jensen (1986), Astalz (1990), and Hart and Moore (1995) suggest that excessive debt prevents from investment through free cash flows for managers and can be placed under the supervision of the lenders. Hence is reduced it and occurs the tendency to earnings management. Otherwise it can be stated, is increased leverage of tendency to earnings management (Dechow and Skinner, 2002), (Beatty and Weber, 2003), (Sweeney, 1994), (Watts and Zimmerman, 1990), (D Fund and Jiambalvo 1994). Currently tendency to the second opinion in the sense that managers tend to Page 131

9 implementation of earnings management to prevent violating debt covenants. Measurement of financial leverage in this study is after than measurement of Kim and Yoon (2008) and thus financial leverage is equal to total debt measured division by total assets. Financial leverage = (total debt) / (total assets) control variables Company size: is calculated from the log of total of whole assets. Book value to market value ratio: is calculated from the ratio of book value to market value. According to the research variables, study models are as follows. ) Earnings Management it = β 0 + β 1 FCF it + β 2 Size it + β 3 BM it + ɛ it 2) Earnings Management it = λ 0 + λ 1 DIV Ratio it + λ 2 Size it + λ 3 BM it + ɛ I t 3) Earnings Management it = γ 0 + γ 1 LEV it + γ 2 Size it + γ 3 BM it + ɛ it According to research models: Earnings Management it : earnings management company of i in year of t DIV Ratio it :Dividend Ratio company of i in year of t FCF: free cash flow company of i in year of t LEV it : Financial Leverage company of i in year of t Size it : company Size Company of I in year of t BM it : book value to market value ratio company of i in year of t Describing research data Average table has been calculated in general including central and variance indexes, skewness and kurtosis including dispersion indexes. Table1: Findings obtained from statistical description of research data Variable name Mean SD skewness Kurtosis Earnings management Page 132

10 Free cash flow dividend Financial Leverage Company size Book value to market value First hypothesis test Findings obtained from test of first research hypothesis are as follows: Table 10: Findings obtained from test of first research hypothesis Variable Test statistic Significant level Fixed value Free cash flow Company size Book value to market value Coefficient of determination: Adjusted coefficient of determination: Test statistic: Significant level: Watson camera statistic: Chow test statistic: Significant level: Hausman test statistic: Significant level: Page 133

11 Significant level has been calculated for each variable as well as for the entire model at 95% confidence level. According to the adjusted coefficient of determination of fitted model can be argued that 69 percent of the dependent variable changes in research hypotheses is explained by the independent and control variables. Violated autocorrelation is one of the standard assumptions of regression model and can be used of Watson-camera statistic to determine the presence and absence of autocorrelation in the regression model. Durbin - Watson calculated (1.58) that is between 1.5 and 2.5 shows the lack of autocorrelation and the independence of remains of the error components. As is shown in Table (10) a significant level of t-statistic for free cash flow variable is 5% lower than acceptable level of error, Therefore, existence of significant relationship between free cash flow and earnings management is approved and the first research hypothesis is accepted. Among the control variables, company size and the ratio of book value to market value have significant direct relationship with earning management. In the final stage companies determined into two levels with high cash flow and low cash flow. Table 11: Findings obtained from testing first research hypothesis Variable T-statistic significance level T-statistic significance level Companies with high cash flow Companies with low cash flow Fixed value Free cash flow Coefficient of determination: Adjusted coefficient of determination: Test statistic: Significant level: Coefficient of determination: Adjusted coefficient of determination: Test statistic: Significant level: Significant level has been calculated for each variable as well as for the entire model at 95% confidence level. According to the adjusted coefficient of determination of fitted model in companies with high and low cash flow can be concluded that about and percent of Page 134

12 the dependent variable changes are explained by the independent and control variables. Due to the significance level and adjusted coefficient of determination calculated can be concluded that there is a stronger significant relationship between free cash flow and earnings management on the basis of accrual anomaly in companies with high cash flow compared to companies with low cash flow. In other words, companies with high level of free cash flow have a significant impact on earnings management. Second hypothesis test Findings from the second research hypothesis are as follows: Table 14: Findings obtained of testing second research hypothesis Variable Test statistic significance level Fixed value Dividend Company size Book value to market value Coefficient of determination: Adjusted coefficient of determination: Test statistic: Significant level: Watson camera statistic: Chow test statistic: Significant level: Housman test statistic: Significant level: Significant level has been calculated for each variable as well as for the entire model at 95% confidence level. According to the adjusted coefficient of determination of fitted model can be argued that 79 percent of the dependent variable changes in research hypotheses is explained by the independent and control variables. Violated autocorrelation is one of the standard Page 135

13 assumptions of regression model and can be used of Watson-camera statistic to determine the presence and absence of autocorrelation in the regression model. Durbin - Watson calculated (1.61) that is between 1.5 and 2.5 shows the lack of autocorrelation and the independence of remains of the error components. As is shown in Table (14) a significant level of t-statistic for free cash flow variable is 5% lower than acceptable level of error, therefore, existence of significant relationship between dividend and earnings management is approved and the first research hypothesis is accepted. Among the control variables, company size and the ratio of book value to market value have significant direct relationship with earning management. In the final stage companies determined into two levels with high cash flow and low cash flow. Table 15: Findings obtained of testing second research hypothesis variable T-statistic significance level T-statistic significance level Companies with high dividend Companies with low dividend Fixed value Dividend Coefficient of determination: Adjusted coefficient of determination: Test statistic: Significant level: Coefficient of determination: Adjusted coefficient of determination: Test statistic: Significant level: Significant level has been calculated for each variable as well as for the entire model at 95% confidence level. According to the adjusted coefficient of determination of fitted model in companies with high and low dividend can be concluded that about and percent of the dependent variable changes are explained by the independent and control variables. Due to the significance level and adjusted coefficient of determination calculated can be concluded that there is a stronger significant relationship between dividend and earnings management on the basis of accrual anomaly in companies with high dividend compared to companies with low dividend. In other words, companies with high level of dividend have a significant impact on earnings management. Page 136

14 Third hypothesis test Findings from the third research hypothesis are as follows: Table 18: Findings obtained of testing third research hypothesis Variable Test statistic significance level Fixed value Financial Leverage Company size Book value to market value Coefficient of determination: Adjusted coefficient of determination: Test statistic: Significant level: Watson camera statistic: Chow test statistic: Significant level: Hausman test statistic: Significant level: Significant level has been calculated for each variable as well as for the entire model at 95% confidence level. According to the adjusted coefficient of determination of fitted model can be argued that 86 percent of the dependent variable changes in research hypotheses is explained by the independent and control variables. Violated autocorrelation is one of the standard assumptions of regression model and can be used of Watson-camera statistic to determine the presence and absence of autocorrelation in the regression model. Durbin - Watson calculated (1.52) that is between 1.5 and 2.5 shows the lack of autocorrelation and the independence of remains of the error components. As is shown in Table (18) a significant level of t-statistic for free cash flow variable is 5% lower than acceptable level of error, therefore, existence of significant relationship between leverage and earnings management is approved and the first Page 137

15 research hypothesis is accepted. Among the control variables, company size and the ratio of book value to market value have significant direct relationship with earning management. In the final stage companies determined into two levels with high financial leverage and low financial leverage Table 19: Findings obtained of testing third research hypothesis Variable T-statistic significance level T-statistic significance level Companies with high financial leverage Companies with low financial leverage Fixed value financial leverage Coefficient of determination: Adjusted coefficient of determination: Test statistic: Significant level: Coefficient of determination: Adjusted coefficient of determination: Test statistic: Significant level: Significant level has been calculated for each variable as well as for the entire model at 95% confidence level. According to the adjusted coefficient of determination of fitted model in companies with high and low financial leverage can be concluded that about and percent of the dependent variable changes are explained by the independent and control variables. Due to the significance level and adjusted coefficient of determination calculated can be concluded that there is a stronger significant relationship between financial leverage and earnings management on the basis of accrual anomaly in companies with high dividend compared to companies with low financial leverage. In other words, companies with high level of financial leverage have a significant impact on earnings management. Discussion and conclusion The aim of this study is to examine the impact of free cash flow, dividends and financial leverage on earnings management despite the control variables of company's size and book value to stock Page 138

16 market value. Study period has been considered from 2004 until the end of That 89 companies were selected as our statistical sample among the companies accepted in Tehran Stock Exchange after conditions' applying. Regarding to the results achieved by there is a stronger significant relationship between free cash flow and accrual-based earnings management in companies with high cash flow compared to companies with low cash flow. In other words, companies with high levels of free cash flow have a direct significant impact on earnings management. In this case, it can be stated that any change in free cash flow resulting in a direct impact on the earnings management. For example, the possibility of investment is provided for the management by increased amount of free cash flow in a company, and this investment is a way to achieve the desired objectives of managers and to create earnings management rather than moving towards stockholders' capital increase. The results of this research hypothesis is consistent with the research results of Jaggi, and Gul (2000), Hashemi and Kamali (2010), Noor Balkish (2013) The research findings show there is a significant stronger relationship between dividends and accruals-based earnings management in companies with high dividend than companies with low dividends. In a better word, companies with a high level of dividend payments have a direct significant impact on earnings management. This relationship indicates that the earnings management increases with increased dividends. For example dividends can disperse free cash flow. When companies are close to debt contract which needs limited dividends and managers may be tempted to manipulate earnings, and increase earnings to maintain stock. The results of this research hypothesis do not match with the results of Noor Balkish (2013). As well as the results of the third hypothesis indicates that there is a significant stronger relationship international between financial leverage and accruals-based earnings management in companies with high financial leverage than companies with low financial leverage. In a better word, companies with high levels of financial leverage have a significant direct impact on earnings management. The results show that the company may not be able to pay its debts by increased financing as a result the company is faced with bankruptcy risk, and cash existing in the company to become a way to create earnings management and increase it. The results of this research hypothesis are consistent with the research results of Jelinek (2007), Sahafi Esfandabadi (2010), and Noor Balkish (2013). Regarding to the research findings some suggestions are presented as follows: 1. Free cash flow provide an appropriate criterion at the disposal of shareholders and investors in order to assess the financial health of the commercial unit and managers' performance, therefore shareholders and investors should consider free cash flow as a stimulus for earnings management. Page 139

17 2. It is suggested to investors to check company's financial statements carefully when evaluating the company's stock, and all aspects of companies and generalization of the research results about Stock Exchange Market can be effective in reducing the valuation errors. 3. Debt Contracts and increased financing outside the organization or in other words increased financial leverage can be a factor for opportunistic behaviors of managers. Additionally, it is suggested to investors to consider also the amount of financial leverage and debt contracts in evaluating companies and making decisions in investment. It is suggested to the researchers for the future researches: 1. Jones corrected pattern has been used in this study to measure earnings management. It is recommended that other measuring patterns of earnings management should be also used in future researches. 2. Free cash flow, dividend payments, and financial leverage have been used as the effective factors on earnings management in this study. It is recommended in future researches to consider the impact of other effective factors on such factors and to test its relationship with earnings management. Research Restrictions Scientific and studious researches are often faced with some restrictions which damage stability and reliability of the research, and make its generalization trouble. Attending to these restrictions can prepare the mind of reader in the interpretation from results and generalizing them to similar results. The present research is not excluded from these cases, and the restrictions governing it can be as follows: A) Information Quality: Information of financial reports has been used the same way as presented by the companies. A large number of companies have provided audit reports that no adjustment often has been done in the financial statements in this term because the impact of these adjustments may affect the research results. B) Limitation of the studied population: Many studies that have been conducted outside Iran would test a large number of companies. Regarding to the limitations applied on the statistical population, generalization of the results to all commercial units should be done cautiously due to matching companies. C) Lack of stability of economic conditions, change in economic conditions in the study years may affect the research results. Because Tehran Stock Exchange is also strongly influenced by economic and political conditions and investors react to these changes. Page 140

18 References Hasanzadeh Brotheres and Kamranzadeh Azmareh AbdolKarim Hassanzadeh (Spring 2009) "Evaluation of earnings management firm listed in Tehran Vavraq Drbvrs" AUDITING REVIEW Accounting Research.fslnamh first year, No. 2, Dstgyr M., Hosseini Seyed E. (Fall 2013) "a comprehensive overview of management accounting" (first part), Journal of Hslbdary, No. 7. Saidi Ali, Rabie Hamid, Hamidian N. (Summer 2013) "The relationship between real earnings management activities and future performance of listed companies in Tehran Stock Exchange" Article 4, Volume 6, Number 2 (17), Pages Sahafi Esfandabad, SH. (2010). "Its financial leverage and diversification of investments with increasing earnings management". master thesis. University of Esfahan. Mashayekhi, Bita; Mehrani, S; Mehrani, Kaveh and Gholamreza Karami (2005). Discretionary accruals role in the management of firms listed in the Tehran Stock Exchange, IRANIAN accounting and auditing, Issue 42, and pp I Nurvsh, thank Nurosh, I, Nikbakht, Mohammad Reza (Summer 2005) "The earnings management in listed companies in Tehran stock exchange" a particular accounting period of twenty-two, number two, consecutive 43. Valizadeh, Larijani (2008) "actual management results benefit", unpublished thesis, Faculty of Social Sciences and Economics, University of Al. -Hashmy Syed Abbas, Akhaghi H. (Summer 2010) "The effect of financial leverage, dividend policy and the future value of the company's profitability," Journal of Financial Accounting, Issue 6, page Hashmy, Seyed Abbas and Kamal, E. (2010) "Impact of increased financial leverage, the amount of free cash flow in the company profit management" Knowledge of accounting (2), pp Beatty, A. and Weber, J. (2003). The Effect of Debt Contracting on Voluntary Accounting Method Changes. The Accounting Review, 78 (1), Chi, J. and Gupta, M., (2009), Overvaluation and earning management, Journal of Banking and Finance, 33 (9), Dichev, I.D. and Skinner, D.J, (2002). Large-Sample Evidence on the Debt Covenant Hypothesis. Journal of Accounting Research, 40 (4), Dechow, P. M., & Skinner, D. J. (2000), Earnings Management Reconciling the Views of Accounting Academics, Practitioners and Regulators "Accounting Horizons, 14, Page 141

19 DeFond, M. and Jiambalvo, J. (1994). Debt Covenant Effects and the Manipulation of Accruals. Journal of Accounting and Economics, 17, Hart, O. and Moore, J. (1995). Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management. American Economic Review. 85 (3), Farinha, And Moreira, J.A. (2007). Dividends and Earnings Quality: The Missing Link. CETE, Faculty of Economics, University of Porto. Retrieved June 10, 2010 from Jelinek, K. (2007). The effect of leverage increase on earning management. Journal of Business and Economic Studies, 13, Jensen, M. (1986). Agency Cost and Free Cash flow, Corporate Finance, and Takeovers. American Economic Review, 76, Kim, H.J. and Yoon, S.S (2008) the Impact of Corporate Governance on EMin Korea. Malaysian Accounting Review, 7 (1). Lehn, K. and Poulsen, A. (1989). Free Cash Flow and Stakeholder Gains in Going Private Transactons, The Journal of Finance, 44 (3.), Mashayekhi, B., Bagheri, B. and Tahriri, A. (2010). Free cash flows, financial leverage and earnings management: the case of Iran, International Journal of Accounting and Information Management, 18 (1), Nor Balkish. Z, Zuraidah Mohd.S, Salwani Mohamed. I, (2013), The Effect of Free Cash Flow, Dividend and Leverage to Earnings Management: Evidence from Malaysia, See discussions, stats, and author profiles for this Norhayati Zamria, Rahayu Abdul Rahmanb, Noor Saatila Mohd Isac a, b, cfaculty of Accountancy, Universiti Teknologi MARA, Seri Iskandar, Perak, Malaysia Procedia Economics and Finance 7 (2013) Schooley, D.K. and Barney, L.D. (1994). Using Dividend Policy and Managerial Ownership to Reduce Agency Costs. Journal of Financial Research, 17, Sweeney, A.P. (1994). Debt Covenant Violations and Managers' Accounting Responses. Journal of Accounting and Economics, 17, Syed Zulfiqar, A.S., Hui, Y. and Nousheen, Z., (2010). Earnings Management and Dividend Policy: An Empirical Comparison between Pakistani Listed Companies and Chinese Listed Companies. International Research Journal of Finance and Economics, 35, Watts, R.L. and Zimmerman, J.L. (1990). Positive Accounting Theory: A Ten Year Perspective. The Accounting Review, 65, Page 142

20 Yoon, S. S. and Miller, G.A., (2002), "Cash From operations and Earnings Management in Korea" the International Journal of Accounting, 37 (40, Zunaidah, S. and Fauzias, M.N. (2008). Dividends, Ownership Structure and Board Governance on Firm Value: Empirical Evidence from Malaysian Listed Firms. Malaysian Accounting Review, 7 (2), Page 143