The Impact of Corporate Governance Mechanisms on Financial Reporting Quality: Evidence from Listed Companies on the Tehran Stock Exchange

Abstract

Purpose: This study investigates the impact of internal and external corporate governance mechanisms—specifically audit committee independence, board financial expertise, and institutional ownership—on the financial reporting quality of firms listed on the Tehran Stock Exchange (TSE).

Design/Methodology/Approach: A quantitative research design is employed using a balanced panel dataset of 140 non-financial firms listed on the TSE over the six-year period from 2019 to 2024. Financial reporting quality is operationalized using the Modified Jones Model to estimate discretionary accruals, where lower accruals indicate higher reporting quality. The study utilizes Ordinary Least Squares (OLS) regression to test the hypotheses, controlling for firm size, financial leverage, and firm age.

Findings: The empirical results reveal that audit committee independence and board financial expertise have a significant positive impact on financial reporting quality (i.e., they significantly reduce discretionary accruals). Furthermore, institutional ownership is found to have a significant positive relationship with the quality of financial reports, suggesting that institutional investors play an effective monitoring role in the Iranian capital market.

Practical Implications: These findings provide valuable insights for the Securities and Exchange Organization (SEO) of Iran in refining corporate governance codes. The results suggest that mandating financial expertise and independence within corporate structures is essential for protecting investor interests and enhancing market transparency.