Does conservatism in financial reporting affect earnings management: An evidence of Iran

Abstract

This study investigates probable effect of conservatism in financial reporting on earnings management. Based on findings of previous studies about effects of conservatism in financial reporting on earnings management all over the world which lead to contradictory results, we are studying this issue whether conservatism facilitates earnings management or limits it. Sampling population of the present study includes 92 accepted companies at Tehran stock exchange which are working in five main industries of food and drink products, chemical materials and products, other nonmetallic mineral products, basic metals, automotive and manufacturing parts in the time period of 2002 to 2010. Givoly and Hayn model was used to measure conservatism variable. Accrual based earnings management variable was measured with two models of discretionary accruals (modified Jones model) and working capital discretionary accruals and real earnings management also was measured with decrease of selling, general and administrative expenses and increase of non-operating income taken from selling long lived assets and over-production. Results indicate that, conservatism limits earnings management except earnings management based on selling, general and administrative expenses in which conservatism facilitates earnings management. Key words: Conservatism, accrual based earnings management, working capital discretionary accrual, real earnings management.