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Earnings quality and managerial access to debt financing: empirical evidence from Iran

Earnings quality and managerial access to debt financing: empirical evidence from Iran The purpose of this paper is to establish a linkage between two rarely researched areas, i.e. earnings quality (EQ) and access to external and internal debt financing. Specifically, the authors aim to examine whether the quality of a firm’s reported earnings is significantly associated with its access to both private and bank debt financing.Design/methodology/approachThe authors test the hypotheses by employing panel data analysis for a sample of 108 companies listed on the Tehran Stock Exchange (TSE) during 2006-2015. The tests were conducted by using R econometric software.FindingsAfter controlling for some firm-specific factors and consistent with the primary expectations, the results reveal a significant and positive relationship between EQ and managerial access to external (bank) debt financing. In addition, the findings indicate that EQ is negatively associated with internal debt financing which is measured as the changes in firm retained earnings.Research limitations/implicationsAlthough the authors cautiously conducted the present study, there are some limitations that merit further consideration. First, the authors collected the data manually from 14 categories of industries in the TSE and, accordingly, an aggregate analysis across multiple categories of industries might have missed industry-specific and unique issues. Second, the authors used a narrow conceptualization of accruals quality which merely assesses a firm’s EQ. The measures can be enhanced by including more actionable proxies. Third, since the data on debt financing were collected from two different sources, this might have caused common method variance in the results procedurally.Originality/valueSince the fundamental institutional assumptions underpinning the Western and even East Asia debt contracting and EQ models are not valid in the institutional environment of Iran, the findings could provide substantial implications for the understanding of both debt financing and the quality of earnings. These significant institutional and ownership differences are the factors affecting firms’ leverage and capital choice decisions. Indeed, the study has laid some groundwork upon which a more detailed evaluation of the Iranian firms’ financial structure could be based. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic and Administrative Sciences Emerald Publishing

Earnings quality and managerial access to debt financing: empirical evidence from Iran

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References (78)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1026-4116
DOI
10.1108/jeas-01-2017-0001
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to establish a linkage between two rarely researched areas, i.e. earnings quality (EQ) and access to external and internal debt financing. Specifically, the authors aim to examine whether the quality of a firm’s reported earnings is significantly associated with its access to both private and bank debt financing.Design/methodology/approachThe authors test the hypotheses by employing panel data analysis for a sample of 108 companies listed on the Tehran Stock Exchange (TSE) during 2006-2015. The tests were conducted by using R econometric software.FindingsAfter controlling for some firm-specific factors and consistent with the primary expectations, the results reveal a significant and positive relationship between EQ and managerial access to external (bank) debt financing. In addition, the findings indicate that EQ is negatively associated with internal debt financing which is measured as the changes in firm retained earnings.Research limitations/implicationsAlthough the authors cautiously conducted the present study, there are some limitations that merit further consideration. First, the authors collected the data manually from 14 categories of industries in the TSE and, accordingly, an aggregate analysis across multiple categories of industries might have missed industry-specific and unique issues. Second, the authors used a narrow conceptualization of accruals quality which merely assesses a firm’s EQ. The measures can be enhanced by including more actionable proxies. Third, since the data on debt financing were collected from two different sources, this might have caused common method variance in the results procedurally.Originality/valueSince the fundamental institutional assumptions underpinning the Western and even East Asia debt contracting and EQ models are not valid in the institutional environment of Iran, the findings could provide substantial implications for the understanding of both debt financing and the quality of earnings. These significant institutional and ownership differences are the factors affecting firms’ leverage and capital choice decisions. Indeed, the study has laid some groundwork upon which a more detailed evaluation of the Iranian firms’ financial structure could be based.

Journal

Journal of Economic and Administrative SciencesEmerald Publishing

Published: Apr 17, 2018

Keywords: Iran; Earnings quality; Bank financing; Tehran stock market

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