Beyond the Threshold: The Role of Corporate Governance and Growth Opportunities in Earnings Management

Abstract

Earnings management is one of the most significant issues in accounting and finance literature, referring to managers’ behavior in manipulating discretionary accruals or making real operational decisions in order to achieve desired levels of reported earnings. Among different types of earnings management, pre-threshold earnings management represents a specific form in which managers adjust reported earnings with the aim of avoiding losses or surpassing commonly recognized earnings benchmarks. On the other hand, internal control and monitoring mechanisms within firms, particularly Corporate Governance (CG), play a crucial role as an effective mechanism for aligning the interests of managers and shareholders and limiting opportunistic managerial behavior. Moreover, firms’ growth opportunities may influence managers’ incentives toward more conservative financial reporting or, conversely, greater engagement in earnings management, as firms with higher growth opportunities are generally subject to greater expectations from investors. Therefore, simultaneously examining these two factors and their effects on pre-threshold earnings management can contribute significantly to understanding firms’ financial reporting behaviors and earnings quality. This study aims to investigate the impact of CG and growth opportunities on pre-threshold earnings management in companies listed on the Tehran Stock Exchange (TSE). The temporal scope of the study covers the period from 2014 to 2024. The independent variables of the research are CG and firms’ growth opportunities, while pre-threshold earnings management is considered as the dependent variable. The study consists of two hypotheses: the first hypothesis examines the effect of growth opportunities on pre-threshold earnings management, and the second hypothesis investigates the impact of CG on pre-threshold earnings management. Data were collected through library research and document analysis methods. To test the research hypotheses, a multiple linear regression model using the Generalized Least Squares (GLS) approach was employed. The results of the hypothesis tests indicate that both growth opportunities and CG have a significant negative effect on pre-threshold earnings management.