The impact of financial leverage sharp increase on earnings management on the accepted firms in Tehran Stock Exchange

The aim of the current study is to see the changes in the amount of benefit management regarding the firms whose liabilities increase to a large extent. The managers of these kinds of firms normally have more motivations to satisfy credit providers through profit management. But it seems that auditors and financial providers' more attention to these firms' leads to having more regular managers and decreasing profit management performance. The tested sample includes 136 firms among the accepted ones in Iran Stock Exchange considering a period of eight years from the beginning of 2000 to the end of 2007. In order to estimate the rate of profit management performance by the use of Jones adjusted model, the optional committed items were calculated. The hypotheses were tested via regression method. The results demonstrated that the increase of most liabilities causes the decrease of profit management performance. In fact, liability makes managers have less access to free cash flows in order to pay the liability and its interest; therefore, they cannot take advantage of the opportunities such as non-optimization investment, extra cost tolerance and earning waste. In other words, the more the liabilities increase, the more regular the managers perform.