Efficient Opportunistic Earning Management and Financial Constraints: Testing of Debt Hypothesis in Accounting Positive Theories

Despite all strong literature reviews about earnings management, there is no correct explanation of the accruals utilization effect on a firm's financial decisions. Firms with financial constraints can adjust debt contract requirements and decrease the cost of their debts using discretionary accruals with positive signal to the market. This study is aimed to examine the relation of effective opportunistic earnings management to financial constraints. The sample consists of 94 firms listed in Tehran stock exchange over the period from 2001 to 2016. To measure the earnings management variable, the rolling linear regression and time series data are used. The multivariate regression using panel data is used to examine the first hypothesis and the multivariate regression using cross-sectional data is used to examine the second and third hypotheses. The results show that there is a positive significant relation between financial constraints and earnings management. Also examining two kinds of earnings management, as opportunistic and effective, indicates that there is no significant relation between financial constraints and effective earnings management, but there is a positive significant relation between financial constraints and opportunistic earnings management. Therefore, in Iranian capital market, managers use opportunistic earnings management even in financial constraints occasions in the line of their personal benefit.