Academic journal article Global Business and Management Research: An International Journal

The Investigation of the Effect of Income Smoothing on the Reported Earnings Quality of Active Collapsed Companies in Tehran Stock Exchange (TSE)

Academic journal article Global Business and Management Research: An International Journal

The Investigation of the Effect of Income Smoothing on the Reported Earnings Quality of Active Collapsed Companies in Tehran Stock Exchange (TSE)

Article excerpt

Introduction

On the one hand, managers as providers of the financial statements awarding of the financial positions of the company and having privileged information than the financial statements users (Kordestani and Amirbygi, 2008); on the other hand, increasing manager's information regarding accounting procedure and methods, along with booming in the capital market and also accounting standard and principles flexibility, lead to incentives in managers to show a good picture of the companies' financial position through a phenomenon so-called earnings management (Javadian kutnaee, 2000). According to Iran conceptual framework, the objective of the financial statements is to report condensed and classified information about financial position, performance and flexibility of an entity, which is useful for wide range of the financial statement users and the economic decisions.

Also, under Iran conceptual framework, information will be useful if have certain characteristics so-called "Qualitative Characteristics of Accounting Information" which is necessary for enhancing the quality of financial reporting and for usefulness in decision-making (Iranian accounting standards setting committee, 2007). In the midst of this, net income is one of important items, which is reported in the financial statements and has various applications in the accounting and financial reporting. Generally, profit is a base for tax calculation, a factor for policy-making about dividend, a leader for investors and decision-making and finally is a factor in forecasting. Calculating company's net income is influenced by the accounting method and estimations. Therefore, there is a possibility of income manipulation by management. The studies have shown that income persistency is an indicator for its quality. However, investors can invest with more confidence in a firm with persistent income trend. Therefore, because profit is one of important criteria in performance evaluation and determination company's value so earnings quality is an important issue for accounting researchers and investment management (Esmaeli, 2007). Studies have been done in worldwide have presented mixed results regarding the effects of income smoothing on the quality of reported earnings. Researchers, in some cases, put emphasis on the negative effects of income smoothing on the quality of reported earnings and, in other cases, on the positive effects of income smoothing on the quality of reported earnings. On the one hand, taking these paradoxes into consideration favoring the effects of income smoothing on the quality of reported earnings, and on the other hand, the existence of the same results regarding relationship between income smoothing and financial collapses of firms listed in TSE, indicate that collapsed firms engage in income smoothing in order to keep themselves in capital market (Jabbarzadeh et al., 2009). In this research, we will try to answer the question that: "Does income smoothing (whether real or artificial) increase the quality of reported earnings or decrease it in active collapsed firms of TSE?

The paper proceeds as follows: The next section summarizes the related literature and describes the potential contribution of our study. After hypotheses development, we describe the data and the methodology. Then we will present statistical models and methods of research hypotheses testing. Finally, after presenting empirical results we will report the main results and conclusions.

Literature Review

From informational view, income states the economic activates results. However, as a basic measure of assessment is doubtful. According to efficient market hypothesis (EMH), empirical researches indicate that income has information content (Hagigat and Raygan, 2008). Accrual accounting provides for managers a choice in profit determination in different periods. In fact, under this accounting system, managers have a significant control on recognition of some revenue and expense items (Mashayekhi et al. …

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