Effect of stock indices on cash flow and earnings management

Abstract

The main objective of this study is to investigate the effect of stock indices on cash flow and earnings management in companies listed on Tehran Stock Exchange. In other words, this study has tried to answer the question that whether the stock indices on cash flow and earnings management in companies listed on Tehran Stock Exchange can weaken the correlation between free cash flows and earnings management or not? To answer the question, a sample of 104 companies listed on Tehran Stock Exchange during 2011-2015 is studied. The variable of earnings management is evaluated using Jones Model (1995). To test research hypotheses, regression models are used at the confidence level of 95%. The results obtained from this study show that in general, there is significant correlation between earnings management and free cash flows. Then, the effect of stock indices on cash flow and earnings management on the correlation between free cash flows and earnings management is studied in the companies listed on Tehran Stock Exchange. The results have shown that there is no significant correlation between earnings management and managerial stock ownership in companies with high free cash flow and low growth.

Keywords: stock indices, free cash flows, stock ownership, earnings management