The impact of privatization on earnings management in a developing country like Iran

Abstract

One of the important reasons for privatization is increasing management performance because privatization is often associated with a change in the management of the company, on the other hand, managers in the private companies have more freedom than public companies, also in the private companies giving reward is based on performance, and then managers have enough incentive to manipulate earnings. The main purpose of this study is to investigate if this theoretical literature is true in practice especially in developing country like Iran. For this purpose this paper investigates the effect of privatization on earnings management to see if EM changes after privatization toward before it. In fact, it tests earnings management behavior in the period surrounding the privatization. The results show that firms with low earnings before accruals have relatively high earnings management than firms with high earnings before accruals, and the private companies involved in more aggressive earnings management practices or in detail, private companies tend to manipulate earnings upward more aggressively when their earnings before discretionary accruals are poor, and they downplay their earnings more than public companies when their earnings before discretionary accruals are exceptionally high. Also, the government action to restructure the company before inviting prospective investors is considered consistent with earnings management. It is opined that the findings of this study are indicative of what could be the situation surrounding privatization in developing country like Iran. Also, these results show earnings management after privatization removes quickly upward than the period before privatization. Key words: earnings management, privatization, private company, public company, earnings before accruals, discretionary accruals, total accruals.