Agency fees, free cash flow and conservatism

Conservatism, by affecting dividends, makes implicit contracts concluded between stakeholders in a business unit, especially between shareholders and creditors. According to the theory of conflict of interest between managers and owners, some managers may be forced to invest free cash flows in current negative net worth projects to secure some personal gain in the short term. In this study, the relationship between agency costs, free cash flow and conservatism in companies listed on the Tehran Stock Exchange was investigated. This research is a descriptive-correlation method and is an applied research. The statistical population of the research consists of all companies listed in the pharmaceutical industry of Tehran Stock Exchange during the years 1394 to 1398 that 131 companies have been active in the stock market throughout the research period and have been studied. The research data were extracted from the financial statements of companies and analyzed using regression models using the combined data method. The findings show that there is a significant relationship between agency costs and free cash flow with conservatism. Also, free cash flow affects the relationship between agency costs and conservatism.