There is a form of interaction between governments and firms. In return for firms implementing government policies, governments provide these firms with a range of benefits, including preferential access to markets, tax incentives, easier access to credit, government subsidies, profitable contracts, reductions in customs tariffs, and other advantages.

Firms seeking opportunities to grow and improve their current conditions welcome this two-way interaction between the government and firms. The government considers establishing relationships with these firms as a means of controlling them.

Shleifer and Vishny [1] argue that governments attempt to bring firms under their influence through subsidies and financial assistance, while firms seek to influence governments through political costs. Since politically connected firms generally seek to pursue their interests through political relationships, they may conceal or hide any deliberate misleading actions in their financial reports from investors, thereby sacrificing the interests of minority shareholders [2]. Public opinion polling is one of the technological developments that has influenced the nature of political communication and is used in various forms of such communication. Public opinion polling has generally been regarded as a means of advancing social research and shaping public attitudes or promoting political ideas and candidates. Experts believe that when public opinion polling serves political propaganda, it enhances the capacity of governments, political parties, and wealthy pressure groups to influence public opinion.

One of the objectives of accounting reporting is to provide useful information about the financial performance of a business entity to a broad range of users. The income statement is one of the basic financial statements that fulfills this objective. Some argue that investors place greater value on firms with stable and sustainable earnings; consequently, managers may engage in earnings management to increase their firms’ stock prices [3]. From the perspective of political economy, major shareholders and managers who are connected to political power centers can influence the financial performance of their firms [4].

Furthermore, within the political process, politicians, like any other individuals, have incentives to transfer wealth. They are not merely intermediaries between competing interest groups; rather, they are themselves an interest group. Politicians and all political parties have incentives to increase the resources under government control because such an increase enhances their ability to exercise power [5].

Income smoothing enables managers to reduce investors’ perceptions and estimates regarding fluctuations in the underlying earnings trend, which, in turn, reduces their assessment of the probability of bankruptcy. Income smoothing decreases in proportion to the level of information asymmetry. This managerial action can improve the information content of earnings figures and ultimately enhance the efficiency of accounting information in improving investors’ decision-making. This process occurs through a reduction in information asymmetry and lower errors by investors in using such information. Since users’ ability to utilize information is limited and heterogeneous, income smoothing also affects investors’ perceptions of risk, because firms with highly volatile earnings are perceived as riskier than firms with smoother earnings, thereby reducing investors’ confidence in the future [6]. In light of the foregoing discussion regarding Political Connections (PCF) and income smoothing, the present study examines the effect of PCF on income smoothing, with institutional investment serving as a moderating variable.

Corporate governance has paid particular attention to the separation of ownership and control in modern corporations and has consequently attracted considerable interest from fields such as accounting and finance. This is because many theorists have considered corporate strategy to be a fundamental factor in corporate performance.

Jensen and Meckling [7] proposed the foundations of agency theory and defined the manager as the agent and the shareholder as the principal. In their analysis, the shareholder stands in opposition to the manager. One of the main assumptions of agency theory is that the principal and the agent have conflicting interests; therefore, the separation of ownership from management has resulted in an organizational problem known as the agency problem. The primary agency problem concerns the existence of conflicting interests between shareholders and managers; that is, shareholders seek to maximize the value of their investment, whereas managers primarily seek to increase their own wealth. Therefore, managers may not necessarily act in the interests of shareholders.

Managerial embezzlement and financial corruption, as well as the diversion of shareholders’ interests from the company, are extreme examples of such conflicts of interest. This agency problem highlights the necessity of controlling corporate management by shareholders. Today, the term corporate governance is an important and evolving concept in the business world. Corporate governance forms the foundation of a company’s relationships with its stakeholders. In general terms, corporate governance refers to the system by which a company is controlled and directed; a system that determines, controls, and guides the relationship between a company and its stakeholders. At the micro level, corporate governance seeks to achieve corporate objectives, while at the macro level, it aims at the optimal allocation of society’s resources. Corporate governance consists of a set of internal and external corporate control mechanisms that establish an appropriate balance between shareholders’ rights, on the one hand, and the needs and authorities of the board of directors, on the other. Ultimately, these mechanisms provide shareholders, providers of financial resources, and other stakeholders with reasonable assurance regarding the preservation of their interests [8]. Early contributors to agency theory, Spence and Zeckhauser [9], attempted to introduce the basic framework of agency theory. Agency theory begins with the assumption that individuals act in pursuit of their own self-interest and encompasses the notion that, under normal circumstances, the objectives, interests, and risks of the two parties (the principal and the agent) are not identical. This theory states that when a manager does not own 100 percent of the company’s shares, an inherent conflict between shareholders and the manager is inevitable.

This situation gives rise to several agency problems, including conflicts of interest between shareholders and managers, moral hazard, uncertainty and risk-sharing, information asymmetry between shareholders and managers, and the adoption of undesirable decisions (ibid.). One solution to the agency problem is the establishment of appropriate corporate governance practices.

Shleifer and Vishny [1] defined corporate governance as a means through which providers of corporate finance ensure that they receive a return on their investment. Another definition of corporate governance describes it as a set of mechanisms that have evolved to mitigate the effects of the separation between management and the financing of business organizations.

Corporate governance mechanisms affect the information disclosed by companies to their shareholders and reduce the likelihood of incomplete and inadequate disclosure, as well as the disclosure of less reliable information [10]. From an international perspective, corporate governance can be defined as a set of mechanisms that encourage corporate managers to pursue their self-interest in decision-making while maximizing firm value for owners [11].

Appropriate corporate governance facilitates timely disclosure and reporting by companies. The objective of corporate governance is to ensure that opportunistic behavior does not occur, which is achieved by reducing agency problems and potential information asymmetry between agents and various stakeholders, including shareholders, creditors, and others. Reducing such problems increases shareholders’ willingness to trade in these markets and enhances the liquidity of shares in the market [12].

Tee [13] examined the relationship between PCF and income smoothing, with institutional investment as a moderating variable. The results showed that PCF affect income smoothing. Institutional investment moderates the relationship between PCF and income smoothing.

Kim et al. [14] examined short-term institutional investment and the cost of debt. The results obtained from data analysis using panel data regression showed that short-term institutional ownership affects the cost of debt.

Tee [13] examined the effect of institutional ownership on the relationship between corporate PCF and audit fees. This study used financial statement information from companies listed on the Malaysian Stock Exchange during the period 2003–2011. The results indicate that firms with institutional ownership incur higher audit fees, and this positive relationship is more likely to occur in firms with PCF.

Chen et al. [15] investigated the relationship among income smoothing, institutional ownership, discretionary accruals, and stock price crash risk. The sample consisted of all non-financial firms from 1993 to 2011. Income smoothing does not reflect firms’ actual performance. The findings indicate that income smoothing reflects managerial reporting opportunities and increases private information, which, in turn, encourages managers to conceal bad news.

Liu et al. [16] examined the relationship between PCF and auditor choice and the transparency of financial statements. The study used financial statement information from 3,640 firm-year observations of companies listed on the Chinese Stock Exchange. The results showed that PCF, measured by payments made to the government, have a positive effect on the relationship between auditor choice and accounting information transparency.

Jin et al. [17] examined the relationship between PCF and stock price crash risk. Their findings indicate that politically connected firms have lower stock price crash risk than their peers. In addition, the effect of PCF varies depending on their type and strength.

Brama et al. [18] examined real earnings management, accrual-based earnings management, and PCF. The objective of the study was to investigate the relationship between real earnings management, accrual-based earnings management, and PCF. The results showed that firms’ PCF have a significant relationship with both real earnings management and accrual-based earnings management. Furthermore, the level of public monitoring of firms with PCF is significantly related to both their real earnings management and accrual-based earnings management.

H1: PCF have an effect on income smoothing.

H2: Institutional investment moderates the relationship between PCF and income smoothing.

This study is quantitative and applied in nature. The research design is quasi-experimental and uses a one-time ex post facto approach using historical data. The ex post facto method is used when the researcher examines an issue after the occurrence of events and when manipulation of the independent variables is not possible [19].

A library research method was used to examine the theoretical foundations and research background. The required data and information for the selected companies were collected by referring to the financial statements and accompanying notes to the financial statements of companies listed on the Tehran Stock Exchange, available through the Codal system and Rahavard Novin Version 3 software.

Finally, the data were prepared using Excel software, and descriptive statistics, validity and reliability assessments of the research variables, the effects of the research variables, and inferential tests were conducted using SPSS Version 25 and EViews software.

To evaluate the proposed research hypotheses, the estimated regression models were analyzed using panel data regression techniques. Table 6 summarizes the statistical results of the hypothesis test, including the estimated coefficients, standard errors, t-statistics, and significance levels for the explanatory and control variables. The table also reports the overall significance of the regression model, its explanatory power, and the Durbin–Watson statistic. These results provide the basis for assessing the statistical significance and direction of the relationships between PCF, the control variables, and income smoothing.

Table 6 presents the results of the regression analysis conducted to examine the effect of PCF on income smoothing. The results indicate that the coefficient of PCF is -0.311, with a standard error of 0.082 and a t-statistic of -3.799. The significance level associated with this coefficient is 0.024, which is below the conventional 5% significance threshold. Therefore, PCF have a statistically significant effect on income smoothing. The negative coefficient indicates that an increase in the level of PCF is associated with a decrease in income-smoothing behavior.

Accordingly, H1 is supported, indicating that PCF significantly affect firms' income-smoothing practices. With respect to the control variables, Financial Leverage (LEV) has a positive and statistically significant coefficient of 0.001 (t = 2.492, p = 0.012), suggesting that firms with higher financial leverage tend to exhibit greater income-smoothing behavior. ROA also has a positive and statistically significant coefficient of 0.511 (t = 4.869, p = 0.018), indicating that more profitable firms are associated with a higher level of income smoothing. In contrast, CF has a negative coefficient of -0.071; however, its significance level is 0.090, which exceeds the 5% threshold. Thus, CF does not have a statistically significant effect on income smoothing at the 5% significance level.

The overall significance of the regression model is indicated by the Fisher F-statistic of 13.8468, with a significance level of 0.0000. This result indicates that the explanatory variables, taken together, have a statistically significant relationship with income smoothing and that the estimated regression model is statistically significant as a whole. The coefficient of determination (R²) is 0.6415, indicating that approximately 64.15% of the variation in income smoothing is explained by the variables included in the model. The adjusted coefficient of determination is 0.5713, suggesting that after adjusting for the number of explanatory variables, approximately 57.13% of the variation in income smoothing is explained by the model. These values indicate a relatively satisfactory explanatory power for the estimated model. Finally, the Durbin– Watson statistic of 1.8044 is close to the benchmark value of 2, suggesting that there is no serious evidence of first-order autocorrelation in

This study examined the effect of PCF on income smoothing and investigated whether institutional investment moderates this relationship. Using panel data covering the period from 2017 to 2023, the study employed regression models to examine the proposed hypotheses while controlling for financial leverage, ROA, and CF. The findings provide evidence that PCF and institutional investment are relevant factors in explaining firms' income-smoothing behavior. The results of the first hypothesis indicate that PCF have a statistically significant negative effect on income smoothing. The coefficient of PCF is negative and statistically significant, suggesting that firms with stronger PCF tend to exhibit lower levels of income-smoothing behavior. This finding indicates that political ties may influence firms' financial reporting practices and managerial incentives in ways that affect the extent to which reported earnings are smoothed over time. The finding regarding the first hypothesis is not consistent with Habib et al. [20], who argued that policymakers require or encourage firms to disclose information concerning their relationships with governments, political parties, and politicians so that policymakers and other stakeholders can better assess the quality of firms' reported earnings.

However, the present finding is consistent with Braam et al. [18], who reported that the existence of political relationships among sampled firms is associated with higher accrual quality. It is also consistent with Lin et al. [21], who found that firms with stronger PCF exhibit greater use of accounting accruals and that managers may use their accounting discretion to influence reported earnings, including reducing reported earnings to lower tax payments and potentially increase managerial benefits. Taken together, these findings suggest that the consequences of PCF for corporate financial reporting may depend on the institutional environment, the nature of political ties, and the incentives faced by managers. The results of the second hypothesis provide evidence of a significant moderating effect of institutional investment on the relationship between PCF and income smoothing. The interaction term between PCF and institutional investment (PCF × INST) is positive and statistically significant. Given the negative coefficient of PCF in the regression model, the positive interaction coefficient indicates that institutional investment weakens the negative relationship between PCF and income smoothing. In other words, as institutional investment increases, the negative association between PCF and income smoothing becomes less pronounced.

This finding highlights the importance of ownership structure in understanding the consequences of PCF for corporate financial reporting behavior. Institutional investors generally possess greater resources and incentives to monitor managerial decisions and corporate reporting practices. However, the positive interaction observed in this study suggests that the presence of institutional investors does not simply eliminate the influence of PCF. Rather, institutional investment changes the strength of this relationship. Therefore, PCF and ownership structure should be considered jointly when analyzing firms' income-smoothing behavior. Overall, the findings contribute to the literature by integrating PCF and institutional investment within a single analytical framework. While previous research has largely examined PCF or ownership characteristics separately, the present study demonstrates that the relationship between PCF and income smoothing is conditional on the firm's institutional ownership structure. The results therefore provide a more nuanced understanding of how political and ownership characteristics jointly shape corporate financial reporting behavior.

PCF Political Connections ROA Return on Assets CF Cash Flow

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

The data that support the findings of this study are available within the article. No additional data are associated with this publication.

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

ChatGPT (GPT-4, OpenAI) was used solely for language editing and structural refinement of the manuscript. The AI tool was not used to generate research ideas, conduct the literature search, interpret findings, or produce any data or mathematical content. The author has reviewed and verified all AI-assisted text and takes full responsibility for the integrity and originality of the work.