The Effect of Ethical Leadership Style on Reducing the Dark Personality Dimensions of People Involved in Earnings Management

One of the active financial entities in the Iranian capital market is brokerage companies, which have played an important  role in the recent capital market developments. These entities usually have an entire business because of a lack of granting a permit to such entities. On the other hand, these entities were ignored due to a lack of disclosing their financial statements. Researchers in financial and accounting areas have rarely propounded them due to their financial data unavailability. However, due to the notice of many capital market activists to these entities, and requests  for the increase of financial transparency in these entities, and discussions about the initial public offering of these entities in order to destroy the exclusivity of their business, accounting profit is one of the items of financial statements of these entities which has been noticed by many beneficiaries and users of financial statements, because this item includes essential information for other beneficiaries and managers as rewards. Therefore, many managers and providers of such financial statements and reports try to adjust their profit values to preserve their own companies (increment of company's value in valuation for Initial Public Offering) and their benefits. making financial decisions by users of financial statements requires evaluating and focusing on the financial position, performance and cash flows of the entity and using them in the expected forecasts. Since the calculation of profit of business company is influenced by accounting methods, judgment, personality and experiences of preparator and the preparation of financial statements is the responsibility of the management of the company, so the type of management personality is one of the important factors affecting their behavior in earning management. Since opportunistic earnings management can be considered as examples of abnormal and inefficient behavior, As a result, dark (negative) personality dimensions can play a role in the development of earnings management. On the other hand, because of management’s position to do, earnings management can play a significant role in intensifying and weakening the actions of managers. The existence of moral leadership can act as a moderating factor. Therefore, in this study, due to the lack of review of the cases in Iran, the effect of ethical leadership style in reducing the dark personality dimensions of people involved in earnings management was investigated.

One of the financial institutions active in the capital market, which play a significant role in the evolution of the capital market, are brokerage companies, which have been less studied in the researches of finance and accounting in Iran due to the non-disclosure of the information of their financial statements. So, the statistical population of the present study consists of brokerage company registered at the Stock Exchange Organization, which finally selected 80 brokerage firms using elimination sampling. Measurement of earnings management and determination of the person involved in earnings management was performed based on the data of financial statements in the period 2012 to 2020.And standard questionnaires of dark personality and ethical leadership and financial statement data have been used. Also, the multiple regression test and structural equations model used. Because standard regression analyses substantially ignore many measurement errors in descriptive variables, and cannot study the direct and indirect effects of involved variables in a model, the relationship between dependent and independent variables is not clear in these models. The Structural Equations Model is used and uses Lisrel 8.8 Software and Structural Equations Model to determine their relationships.

The results indicate that most of the people involved in earnings management are the CEOs of these companies. In addition, the results indicate a significant negative relationship between ethical leadership and Machiavellianism, narcissism, psychopathy, and generally indicate the negative impact of ethical leadership on reducing the dark personality dimensions of people involved in earnings management Which confirms the leader-member exchange theory.

The results of this study indicate that ethical leadership in any company by establishing ethical communication, playing an ethical role (being a role model) and seriousness in paying attention to ethics by using methods to strengthen ethical behavior and reduce immoral behavior (being pragmatic), can affect the ethical mood and ethical condition. Eventually, this will reduce the incidence of dark personality traits of people involved in earnings management in this companies. These results highlight the role of self-regulatory organizations' oversight of brokerage performance. This research indicates the positive effects of SEO regulations for compelling brokerage companies to follow an ethical leadership style in their brokerage companies. On the other hand, this can be attributed to the necessity of observing ethical principles and applying ethical leadership style by board members in these companies due to their parallel monitoring and inspection of a self-regulatory organization (Securities Exchange  Organization, Tehran Stock Exchange, Iran Fara Bourse, Iran Mercantile Exchange, and Iran Energy Exchange). The monitoring discussions in these companies have received tremendous attention due to their businesses' exclusivity, including lodging various offending files about such companies in the Committee for the Investigation of Violations of SEO, which caused managers of these companies to pay attention to ethical principles more.