Earnings Management and Investment Opportunities in Frontier Markets: The Suppressor Role of Credit Risk

Abstract

This study examines the association between earnings management (EM) and investment opportunities through credit risk in a sanctioned frontier market. Using a balanced panel of 146 Tehran Stock Exchange firms (2018–2024) with Driscoll–Kraay standard errors and Wild Cluster Bootstrap, we find a positive direct association between EM and the investment opportunity set (IOS), consistent with reverse signaling that may reduce information asymmetry. EM is also positively associated with credit risk, which offsets approximately 17.43% of the direct effect, generating a risk–investment trade-off. The indirect pathway is modest and marginally significant, reflecting competitive mediation. Directional decomposition reveals that only income-increasing manipulation is positively linked to IOS, while income-decreasing manipulation is negatively associated with investment capacity. The results challenge the view of EM as purely opportunistic and highlight the need for adaptive, cash-flow-based credit assessment in frontier markets.