The Impact of Audit Quality, Competitive Environment and Corporate Governance on Managers 'Unethical Behaviors: with Emphasis on Two Dimensions of Decision-making Horizon and Type of Forecast in Managers' Behavior

Document Type : Research Paper

Authors

1 Assistant Professor of Management, East Tehran Branch, Islamic Azad University, Tehran, Iran.

2 Assistant Professor of Accounting, Qom University, Qom, Iran.

10.22103/jak.2021.16609.3347

Abstract

Objective: This research is in the field of corporate governance and behavioral finance. Conflicts of interest between directors and shareholders create agency costs for shareholders' equity that are borne by shareholders. Two sources of this conflict are managerial optimism and managerial myopia. Managerial optimism is favorable if it is about the manager's personal ability or about market conditions, but entrepreneurs and executives are often hurt by optimism bias. On the othe hand, myopic managers avoid spending on activities that benefit the company in the long run, such as research and development, because of their attitudes toward short-term profits or other factors such as short-term institutional investors. Expenditures in research and development activities are serious drivers of innovation in the company that contribute to the company's competitive advantages and sustainable economic development. Accordingly, there is an argument that in the country's economic environment, regulatory stimuli including corporate governance, audit quality and competitive environment of the company can create transparency and effective supervision to cause a fundamental limit on managers' unethical behaviors such as myopic and optimistic behaviors.
Methods: for this purpose, According to different considered theories, six hypotheses are developed and data on 155 companies listed in Tehran Stock Exchange for the period between the years 2008 to 2017 are analyzed. In this study, a multivariate regression model has been used to analyze the test of research hypotheses. The research method using Panel data method with fixed effects approach and using logistic regression are tested.
 
Results: Findings showed that audit quality has a negative and significant effect on unethical behaviors of management and causes limitations in opportunistic behaviors of management. There is an argument that audit quality has a positive and significant effect on the quality of disclosure. Therefore, the higher the audit quality, the more accurate the estimates and monitoring. Also, the results confirm that corporate governance will reduce and limit unethical management behaviors by increasing the company's supervisory capacity. Stronger corporate governance, by closely monitoring and controlling managerial behavior and decisions, is a limiting factor in managerial biased behaviors and reduces overly optimistic and myopic behaviors. Managers of competing companies compete fiercely to maintain market confidence, and these managers try to gain more market trust with accurate predictions. Despite prediction based on theoretical backgrounf, the results indicate that the company's competitive environment has no significant effect on unethical management behaviors.
 
Conclusion: According to agency theory, there is an argument that the interests of managers are not necessarily in line with the interests of other stakeholders, and managers are always trying to maximize their interests. On the other hand, regulatory mechanisms are at the disposal of other stakeholders to limit the unethical behavior of managers. The results of this study also support the argument that regulatory mechanisms limit the opportunistic behaviors of management because these mechanisms promote transparency and require managers to observe ethics in predictions and strategic decisions. On the other hand, the findings show that the competition mechanism in Iran has no effect on controlling opportunistic management behaviors.

Keywords


افلاطونی، عباس. (1392). تجزیه و تحلیل آماری با Eviews در تحقیقات حسابداری و مدیریت مالی. چاپ اول، تهران، انتشارات ترمه.
امیری، اسماعیل؛ خدامی‌پور، احمد؛ کامیابی، یحیی. (1397). اثر رفتارهای کوته‌بینی و خوش‌بینانه مدیریت بر شفافیت اطلاعات مالی. پژوهش‌های کاربردی در گزارشگری مالی، 13(2)، 177-141.
تقی‌زاده خانقاه، وحید؛ بادآور نهندی، یونس. (1399). ارتباط بین بیش‌اطمینانی مدیریت، تأمین مالی داخلی و کارایی سرمایه‌گذاری. مجله دانش حسابداری، 11(2)، 238-209.
دیدار، حمزه؛ حیدری، مهدی؛ پوراسد، سعید. (1397). تأثیر کوته‌بینی مدیران بر کارایی شرکت‌ها با نقش تعدیل کننده کیفیت راهبری شرکتی در شرکت‌های پذیرفته شده بورس اوراق بهادار تهران. مجله دانش حسابداری، 9(1)، 169-147.
رضازاده، حامد؛ پاک‌مرام، عسگر؛ بحری ثالث، جمال؛ عبدی، رسول. (1399). تأثیر سوگیری در پیش‌بینی سود مدیریت بر رفتار سرمایه‌گذاری شرکت و عدم تقارن اطلاعاتی، مجله دانش حسابداری، 11(2)، 167-139.
مرادی، جواد؛ باقری، هادی. (1393). بررسی مقایسه‌ای تأثیر کوته‌بینی مدیریت و مدیریت سود بر بازده سهام. بررسی‌های حسابداری و حسابرسی، 21(2)، 250-229.
References
Aflatoni, A. (2014). Statistical Analysis with Eviews in Accounting and Financial Management Research, First Edition, Tehran, Termeh Publications [In Persian].
Alkurdi, A., Hussainey, K., Tahat, Y., & Aladwan, M. (2019). The impact of corporate governance on risk disclosure: Jordanian evidence. Academy of Accounting and Financial Studies Journal23(1), 1-16.
Alzoubi, E.S. (2016). Audit quality and earnings management: Evidence from Jordan. Journal of Applied Accounting Research, 17(2), 170-189.
Amiri, I., Khodamipour, A., Kamiabi, Y. (2018). The effect of short-sighted and optimistic management behaviors on financial information transparency. Journal of Applied Research in Financial Reporting, 13(2), 141-177 [In Persian].
Anderson, T.W., Hsiao, C. (1982). Formulation and estimation of dynamic models using panel data. Journal of econometrics, 18(1), 47-82.
Andrew, C.C., Shuping, C., Adam, E., Bin, M. (2018). Does long-term earnings guidance mitigate managerial myopia? www.ssrn.com/abstract=2570037.
Armstrong, C., Blouin, J., Jagonlizer, A. Larcker, D. (2014). Corporate governance, incentives, and tax avoidance. Rock center for corporate governance, Working Paper.
Bouwman, C.H. (2014). Managerial optimism and earnings smoothing. Journal of Banking & Finance, 41, 283-303.
Brochet, F., Loumioti, M., Serafeim, G. (2015). Speaking of the short-term: Disclosure horizon and managerial myopia. Review of Accounting Studies, 20(3), 1122-1163.
Cadman, B., Sunder, J. (2014). Investor horizon and CEO horizon incentives. The Accounting Review, 89(4), 1299-1328.
Campbell, T.C., Galleyer, M., Johnson S.A., Rutherford, J., Stanley, B.W. (2011). CEO optimism and forced turnover. Journal of Financial Economics, 101, 695-712.
Chen, K.Y., Lin, K.L., Zhou, J. (2005). Audit quality and earnings management for Taiwan IPO firms. Managerial Auditing Journal, 20(1), 86-104.
Chen, Y., Lin. F. (2016). Does institutional short-termism matter with managerial myopia? Journal of Business Research, 93, 319-341.
Cremers, M., Nair, V.B., Peyer, U. (2008). Takeover defenses and competition: The role of stakeholders. Journal of Empirical Legal Studies, 5, 791-818.
Dechow, P.M., Sloan, R.G., Sweeney, A.P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.
Didar, H., Heydari, M., Pourassad, S. (2018). The influence of managers' short-sightedness on corporate efficiency with moderating role of corporate governance quality in listed companies of Tehran Stock Exchange, Journal of Accounting Knowledge, 9(1), 147-169 [In Persian].
Griffith, R. (2001). Product market competition, efficiency and agency costs: an empirical analysis (No. 01/12). IFS Working Papers. https://www.econstor.eu/bitstream/10419/71529/1/33016659X.pdf
He, Y., Chen, C., Hu, Y. (2019). Managerial overconfidence, internal financing, and investment efficiency: Evidence from China. Research in International Business and Finance, 47, 501-510.
Jensen, M.C., Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Jiang, B., Liu, C. (2018). Managerial optimism in a competitive market. Production and Operations Management, 27(9), 256-281.
Keller, G., Warrack, B. (2003). Statistics for Management and Economics (6th ed.). Pacific Grove, CA: Duxbury Press.
Kraft. A., Rahul. V., Mohan. V. (2018). Frequent financial reporting and managerial myopia. Accounting Review, 93(2), 249-275.
Li, J., Tong, W. (2012). Managerial overconfidence, CEO Selection and corporate investment: An empirical analysis. Working Paper, Available at: www.ssrn.com.
Li, W. L., & Zheng, K. (2017). Product market competition and cost stickiness. Review of quantitative finance and accounting49(2), 283-313.
Li, Y., Wang, J., & Wu, X. (2019). Distracted institutional shareholders and managerial myopia: Evidence from R&D expenses. Finance Research Letters, 29(June 2019), 30-40.
Lin, Y.H., Hu, S.Y., Chen, M.S. (2005). Managerial optimism and corporate investment: Some empirical evidence from Taiwan. Pacific-Basin Finance Journal, 13(5), 523-546.
Malmendier, U., Tate, G. (2005a). CEO overconfidence and corporate investment. The Journal of Finance, 60(6), 2661-2700.
Mohamed, E.B., Baccar, A., Fairchild, R., Bouri, A. (2012). Does corporate governance affect managerial optimism? Evidence from NYSE panel data firms. International Journal of Euro-Mediterranean Studies, 5(1), 41-56.
Moradi, J., Bagheri, H. (2014). A Comparative study of the impact of managerial myopia and earnings management on stock returns. Accounting and Auditing Reviews, 21(2), 229-250 [In Persian].
Myers, J., Myers, L., Omer, T. (2003). Exploring the term of the auditor client relationship and the quality of earnings: A case for mandatory auditor rotation? The Accounting Review, 78(3), 779-800.
Myers, S.C., Majluf, N.S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221.
Palmrose, Z.V. (1988). 1987 Competitive Manuscript Co-Winner: An analysis of auditor litigation and audit service quality. Accounting Review, 62(1), 55-73.
Palmrose, Z.V., Richardson, V.J., Scholz, S. (1986). Determinants of market reaction to restatement announcement. Journal of Accounting and Economics 37, 59-89.
Randoy, J., Jenssen, J. (2004). Board independence and product market competition in Swedish firms. Corporate Governance, 12(3), 281-289.
Rezazadeh, H., Pakmaram, A., Bahri Sales, J., Abdi, R. (2020). Effect of bias in management earnings forecasts on investment behavior of firm and information asymmetry. Journal of Accounting Knowledge, 11(2), 139-167 [In Persian].
Taghizadeh Khaneghah, V., Badavar Nahandi, Y. (2020). Relationships between managerial overconfidence, internal financing and investment efficiency. Journal of Accounting Knowledge, 11(2), 209-238 [In Persian].
Tinga, I.W., Leanb, Q.L., Kwehc, N., Azizand, A. (2016). Impact of managerial overconfidence and government intervention on firm leverage decision: A mars model approach. Institutions and Economies, 8(3), 85-104.
Titman, S., Trueman, B. (1986). Information quality and the valuation of new issues. Journal of Accounting and Economics, 8(2), 159-172.