Impact of Institutional Environments on relation between Earnings Management and Capital Structure in Companies

Earnings management leads to incorrect judgment of shareholders about the performance of their economic units and their managers, because of the incorrect image of the results of the company's performance, and creates a kind of pessimism among stockholders. Therefore, earnings management is expected to be influenced by the capital structure. Because in the capital structure, financing through debt increases fiscal costs, management can take earnings management to avoid violations of the debt contract. Therefore, the relationship between earnings management and capital structure and the role of institutional environments is very important. Strong institutional environments limit the ability of managers to gain personal interest. Therefore, it reduces the probability of earnings management activities. Companies with strong institutional environments will be supported by investors, in contrast to creditors. Therefore, the main purpose of this study is to investigate the impact of institutional environments on the relationship between earnings management and capital structure. In order to implement the research, the hypotheses were tested on the basis of a statistical sample of 92 of listed companies in Tehran Stock Exchange from 2009 to 2015 using multiple regression models. The results of this study show that companies with a higher level of profit management have a higher financial leverage. Also, institutional environments do not have a significant effect on the relationship between profit management and capital structure.