The Effect of Inflation Rates on the Earnings Quality of the Companies Listed on Tehran Stock Exchange (TSE)

Abstract

The main goal of this study is to investigate the effect of inflation rates on earnings quality of the companies listed on Tehran Stock Exchange (TSE). For this reason, the stability of the four models - earnings persistence, earnings predicted value, value relevance of earnings and timeliness of earnings - are used to evaluate the earnings quality of the corporations. Inflation rate is independent variable. The sample data is restricted to 130 companies listed on TSE during 2000 to 2009. In conducting this research, four hypotheses were proposed to examine the effect of macroeconomic variables on earnings quality of the firms during the designated period. Accordingly, the statistical technique known as the “Panel Data” was exerted to test the research hypothesis. The results of the hypotheses testing demonstrate that there is no significant relationship between inflation rate and earnings quality in the entire industry. However, with examining it in every industry, we observed that in some industries there is a significant relationship between measures of earnings quality and the rate of inflation. There is a positive significant relationship between inflation rate and earnings persistence in the Automotive and Machinery industry. In the Minerals and Mining industries a negative significant relationship exists between inflation rate and value relevance of earnings and a negative relationship exists between inflation rate and timeliness of earnings in the Metal Industry and Other Industries. Furthermore, there is no significant relationship between inflation rate and earnings predicted in six industries studied.