Managerial Behavior in Earnings Report: Role of Investment Inefficiency and Financial Constraints

This research is aimed to analyze the managerial behavior in earnings report, so it investigates the relation of investment inefficiency and financial constraints to earnings management. Earnings management is measured based on Kothari et al (2005) model and investment inefficiency is measured based on the Fazzari et al (1988), Kaplan & Zingales (1997) and Linck et al (2013) models. Financial constraints is measured based on some criteria like net financial leverage, free cash flow, interest rate, dividend payout, operational cash flow, size and age of firms. The sample consists of 260 firms listed in Tehran Stock Exchange over the period from 2009 to 2015. Hypotheses are tested based on panel multivariate regression model. The results show a significant and positive relation between investment inefficiency and earnings management; while there is no significant relation between financial constraints and earnings management.