Corporate Governance and Financial Fraud: Cognitive Evaluation Theory Insights on Agency Theory Prescriptions in Companies in Tehran Stock Exchange

The aim of this inquiry is to investigate the effect of corporate governance on fraud contingency in the cognitive valuation theory that has evaluated fraud contingency in 158 companies of Tehran stock exchange from 2011 to 2015. Logistic regression test has been used to verify the hypotheses. Results of the inquiry have shown that there isn’t any meaningful relationship between external corporate governance (institutional ownership) and the likelihood of fraud. Institutional ownership cannot affect the likelihood of fraud through more inspections on managers in order to control opportunistic demeanor and decreasing agency. One reason for above conclusion is cognitive evaluation theory because cognitive evaluation theory claims that, external pressure and control may excite the internal motives caused by managers independence and leads them to committee fraud in financial statements, in this way, pressure and control eliminate fraud contingency even it can have inverse effect. The other results of this inquiry are lack of relationship between domestic corporate governance (size of the headboard, percentage of non-obligated managers and the role of headboard dichotomy) and fraud contingency. But there is relationship between headboard’s reward and fraud contingency, based on the cognitive evaluation theory external rewards may increase fraud contingency in companies.