The Impact of Earnings Management on the Earnings Quality of Companies Listed on the Tehran Stock Exchange

Abstract

This study tests the theory of opportunistic earnings management. To test this theory, the effect of earnings management on four proxies of earnings quality that originate from three different earnings characteristics was examined. The variable used for earnings management is the absolute value of discretionary accruals, and the proxies used for earnings quality include earnings smoothing, accruals quality, conservatism, and relevance. Earnings smoothing and accruals quality are based on accounting information, and conservatism and relevance are market-based criteria. Data from companies listed on the Tehran Stock Exchange were used to test the hypotheses. The research period is between 2006 and 2017, and 135 companies were selected as a sample. Panel data was used to test the models. The test results confirmed the hypothesis of earnings management being opportunistic for the accounting information-based earnings quality criteria, namely smoothing and accruals quality, and were not confirmed for the market-based criteria, namely conservatism and earnings relevance. Also, the determinants of earnings quality were considered as control variables in the estimation of the models.