The relationship between the outside financing and the quality of financial reporting: evidence from Iran

Purpose – This study aims to investigate the impact of outside financing (equity and debt financing) on the quality of financial reporting in Iran. Design/methodology/approach – Sample includes the companies listed on the Tehran Stock Exchange – 152 companies in a period of four years during 2010-2013. Data were analyzed by using multiple linear regressions with the benefits of the combined data. Findings – The results indicates that there is a positive relationship between the quality of financial reporting based on the qualitative characteristics of the theoretical principles of the Iranian Financial Accounting Standards Board and debt financing. Moreover, there is a negative relationship between the quality of financial reporting based on the Dechow and Dichev (2002) model and debt financing. Additionally, there is a negative relationship between the quality of financial reporting (based on the qualitative characteristics of the theoretical principles of the Iranian Financial Accounting Standards Board as well as the Dechow and Dichev models) and equity financing. Originality/value – Financial statements as the output of the accounting system has always been considered by the investors, the creditors and the government; nonetheless, its dependability in making decisions has always been doubted because of using the accrual principle in the calculation of the reported figure in the statements and, consequently, the possibility of being manipulated by the managers as well as the likelihood of conflict of interest among the managers and the shareholders.