The Effects of Earnings Managements and Capital Structure on Earnings Conservatism

In this study we investigate the effects of earnings management (EM) and Capital Structure (CS) on Earnings Conservatism (EC). Conservatism is one of most important accounting information attributes and reported earnings must have a balanced magnitude of EC. Based on study hypotheses, it is predicted that EM affect equilibrium of EC. That is, EM results in over-conservatism or under-conservatism. Furthermore, tradeoff between equity and debt in CS of firms can affect EM incentives and thereby it can affect EC. In explicit word, it is predicted firms with more financed by equity have more conservative earnings. In order to test hypotheses, EC and discretionary accruals (as as proxies of EM) are measured for 303 firms during 2002-2009 period (totally 1530 firm-year observations). Results show that an increase in absolute values of discretionary accruals is accompanied by increase in magnitude of EC. Firms that engaged in downward EM have more conservative earnings (over-conservatism). In contrast, firms with upward EM have less conservative earnings (under-conservatism). Finally, firms with more financed by equity have more conservative earnings, than others.