Earnings management and accounting conservatism: The case of Iran

Abstract

This paper investigates the relationship between earnings management and accounting conservatism in Iranian firms. In this paper, conservatism is measured by Basu (1997) and Roychowdhury and Watts (2007) models, and earnings management is measured by modified Jones model (1996). The statistical population studied at this research includes firms accepted in Tehran Stock Exchange, and the period of research is the years since 2001 to 2008. The systematic omission method has been used in this research in order to achieve the sample and 480 firm-year observations were chosen as the sample for research. This paper empirically tests the relationship between earnings management and the asymmetric timeliness of earnings using ordinary least squares (OLS) regressions. Results show a negative relationship between earnings management and accounting conservatism. The results suggest that firms with lower levels of earnings management appear to have greater asymmetric timeliness coefficients than firms with higher levels of earnings management. The results are robust to various control variables that include the market-to-book ratio, leverage and firm size. Key words: Earnings management, accounting conservatism, Tehran stock exchange.