An Investigation on the Earnings Quality in Companies (Evidence from Iran)

Abstract

A considerable focus of bottom-line income losses is important in the case of investigating quality of earnings. The future of stock returns is all associated with accruements that are in relation with reliability, and negativity. Earning increases that are accompanied by high accruals, suggesting inferiority of earnings, are related with poor future returns. This study describes the investigation of different hypotheses earnings manipulation, extrapolative fundaments about future growth, and under reaction to changes in business conditions to explain accruals’ predictive power. Differentiations between the hypotheses are grounds on operating performance, the behavior of individual accrual items, discretionary versus fixed investment trust components of accruals, and special items. In the main hypothesis we tested stock return and Earning Quality separately. In this investigation firms in according to a mount of accruals. Later on the validity using within-industry comparisons, and data on Tehran stocks was checked. This means that earnings management occurs with a time lag by market participants. In this research it was indicated that components of accruals including changes in accounts receivable, inventory, other current assets, current liabilities and other current liabilities have not significant effect on stock return. It was also indicated that for discretionary accruals, decreasing of stock return is greater than the decreasing of stock return for non-discretionary accruals.