Earnings Management and the Effect of Earnings Quality in Relation to Bankruptcy Level (Firms Listed at the Tehran Stock Exchange)

Abstract

This paper investigates the relationship between earnings management and quality of earnings for the bankrupt and non-bankrupt firms listed in the Tehran Stock Exchange from 2007 to 2012.The earnings quality is measured by four separate accounting-based earnings attributes: accruals quality, earnings persistence, earnings predictability; earnings and is also examined by testing the relationship between discretionary accruals as a measure of earnings management, being opportunistic or efficient earnings management. Also, the future profitability was measured by each of the three variables, future change of earnings, future cash flow from operation, and future non-discretionary earnings. The results of estimating unbalanced panel data technique for 55 firms subjected to bankruptcy of Altman's model, and 198 non-bankrupt firms, shows that the bankrupt firms tend to use opportunistic earnings management, and the non-bankrupt choose efficient earnings management. Moreover, the results show that earnings management performs better than earnings quality in predicting future profitability. Meanwhile, the non-discretionary earnings more effectively than future change of earnings and future cash flow from operation for providing a picture of the future profitability of the firm.