Short-Term Debt Maturity and Accruals-Based Earnings Management in Tehran Stock Exchange (Iranian Evidence)

Firms face the possibility of a debt run when bad news about the firm is coupled with large amount of debt maturing within a short period of time (short-term debt). To avoid such debt run threats, or to further the possibility of debt contract renewal, firms have strong incentives to project an image of strong financial health. 110 companies from the companies listed in Tehran Stock Exchange during the 5 year period between 2008 to 2012 were reviewed. Opportunistic behavior is proxied by accruals-based earnings management which is measured in terms of absolute value of discretionary accruals. Using a sample of 550 firm-years, we find that the coefficient for short-term debt is negatively associated with discretionary accruals for low creditworthy firms. The result show that firm's financial strength have a decreasing role on the effect of debt maturity on earnings management. This result is not consistent with our expectation that firms with higher creditworthiness (investment grade firms) are associated with more monitoring benefits of short-term debt. In addition to ordinary least squares regressions that include controls for industry, and year fixed-effects, we also report results using panel data fixed effects to control for firm and year fixed effects. By establishing the relation between earnings management and debt maturity structure, we suggest another important factor that must be taken into account when studying earnings management.