Design and analysis of Manager- Shareholder strategy game: An application of game, earnings management and corporate governance theories

Document Type : Research Paper

Authors

1 MSc., Accounting, Rouzbahan Institute Of Higher Education, Sari, Iran

2 MSc., Faculty of Humanities and Social Sciences, Mazandaran University, Babolsar, Iran

Abstract

Conflict and cooperation are the main features of organizations and human’s behavior which are revealed in contraction with others. To maximize their utilities and cooperation maintenance, managers and shareholders take action to apply earning management and corporate governance, or due to any reason (and maybe morally) they decide not to do them. The current paper aims to analyze the conflict between managers and shareholders in Tehran Stock Exchange, using game theory to find an equilibrium point in which the manager and shareholder are the main players, being satisfied across increasing their benefits. The hypotheses are analyzed by using pool data of 87 firms existing in TSE, over the years spanning 2007 to 2012. The first hypothesis and the second to fifth hypotheses are analyzed by using the Best Response function and Mann-Whitney test, respectively. By analyzing the result of the game, it is cleared that strong corporate governance strategy and intense earning management strategy don’t guide the players to equilibrium in utilities. Moreover, "strong corporate governance - slight earning management" strategy profile is a weakly dominant Nash Equilibrium.

Keywords


Abdoli, GH. (2011). Game Theory and Its Applications (Static and Dynamic Games of Complete Information). Tehran: Iranian Student Book Agency (ISBA). (in Persian)
Babajani, J. & Tahriri A. (2014). Market Information about Firms’ Fundamentals and Earnings Management: Evidence from Companies Listed on the Tehran Stock Exchange (TSE). The Iranian Accounting and Auditing Review, 20(1): 19-34. (in Persian)
Brown, L.D. Caylor, M.L. (2004). Corporate Governance and Firm Performance. Journal of Accounting Research. 42(1): 625-658
DeAngelo, L. (1986). Accounting Numbers as Market Valuation Substitutes: A Study of Management Buyouts of Public Stockholders. The Accounting Review, 61(3): 400-420.
Ditmar, A. & Mahrt-smit, J. (2007). Corporate governance and the value of cash holdings. Journal of financial economics, 83(3): 599-634.
Eslami Bidgoli, GH. & Ehtesham Rasi, R. (2011). Application of Game Theory in Evaluation of Stock Investment. Financial Knowledge of Security Analysis (Financial Studies), 4 (11): 96-124. (in Persian)
Fatemi Ardestani, S. F. (2012). Course of game theory, Lesson 1. Tehran: Sharif University of Technology. (in Persian)
Hermalin, B.E. & Weisbach, M.S. (2014). Understanding Corporate Governance through Learning Models of Managerial Competence. National Bureau of Economic Research. DOI: 10.3386/w20028. Available at SSRN: http:// ssrn.com/abstract=2417278. 
Hill, C.A. & McDonnell, B.H. (2015). The Agency Cost Paradigm: The Good, the Bad, and the Ugly. Seattle University Law Review, 38(2): 561-572.
Jiao, J. (2010). Conflict of Interest Game and the Legal Solutions. Forward Position, (15): 61–64.
Jing-cheng, J. I. N. G. (2004). Game Balance of Stakeholders and Management Performance of Businesses [J]. Journal of Sichuan University (Social Science Edition), (4): 125-131.
Kordestani, G. & Tatli, R. (2015). Identification the Efficient and Opportunistic Earnings Management Approaches in the Earnings Quality Levels. The Iranian Accounting and Auditing Review, 21(3): 293-312. (in Persian)
Kothari, S., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39: 163-197.
Kreps, D.M. (1990). Game Theory and Economic Modeling. Clarendon Lectures in Economics. Oxford: Clarendon Press.
Liu, Z. Y. (2006). The Government and the Enterprise: Interest Game and Moral Game. Political Studies, 5: 121–128.
Maranjory, M. & Alikhani, R. (2015). Social Responsibility Disclosure and Corporate Governance. The Iranian Accounting and Auditing Review, 21(3): 329-348. (in Persian)
Moradi, M., Osoolian, O. & Norouzi, M. (2015). Audit Opinion and Earnings Management: Uncertainty in Going-concern. The Iranian Accounting and Auditing Review, 21(3): 318-328. (in Persian).
Mortazavi Kiasari, S. H & Robatmili, M. (2007). Game Theory and Froud Discovery. Accountant. (186): 82-87. (in Persian).
Nekhili, M., Fakhfakh, I., Chtioui, T. & Lakhal, F. (2015). Free Cash Flow and Earnings Management: The Moderating Role of Governance and Ownership. Available at http://www.researchgate.net/publication/27057 8655_Free_cash_flow_and_earnings_management_The_moderating_role_of_governance_and_ownership.
Osborne, M. J. (2004). An Introduction to Game Theory. New York: Oxford University Press.
Rahnama Roodposhti, F, godarzi m. (2009) A game theatrical analyze of financial crisise"inter conf. on global financial crisis (ICGFC 2009), USA, Nevada, June 4-9 lasvegas university.
Rahnama Roodposhti, F. (2010). Accounting and Finance Schools and Theories, Including Theories, Hypotheses, Models, Techniques, Tools. Tehran: Islamic Azad University. (in Persian)
Ronen, J. & Yaari, V. (2002). On The Tension between Full Revelation and Earnings Management: A Reconsideration of the Revelation Principle. Journal of Accounting, Auditing and Finance, 17(4): 273-294.
Ronen, J. & Yaari, V. (2007). Earnings management: Emerging insights in Theory, Practice, and Research. USA: Springer Press.
Rubinstein, A. (1982). Perfect Equilibrium in a Bargaining Model, Econometrica, 50(1): 97–109.
Saghafi, A. & Pourianasab, A. (2010). Earning Management Theory. Accounting and Auditing Researches, 2(6): 34-53. (in Persian)
Scott, W.R. (2012). Financial Accounting Theory. The second volume, Translated by Parsayan A., Tehran: Termeh. (in Persian)
Sun, W., Zhang, J.F. & Li, H.X. (2011). Research on Benefit Main Body Gambling of Stakeholders Based on Moral Element. Chinese Journal of Management Science, 19: 152–155.
Wan, X. (2014). Cooperation and Game between Producers and Managers Based On the Linear Contract. Journal of Applied Mathematics, 2014 (2014): 1-7.
Wang, H. P. (2010). Game analysis of stakeholders in financial conflicts of interest. Modern Business Trade Industry, (8): 159-160.
Zhao, H. (2007). Cooperative Game and Equilibrium among Stake –holders. The Theory and Practice of Finance and Economics, 28 (148): 74–77.