Drivers of Earnings Management: The Profit and Loss before Earning Management

Abstract

This study aims to evaluate the effect of two major drivers including: bad company and also the lower benefit from the profits over the previous year on earnings management process of active companies in the capital markets in Iran. Research time period is 6-year (from 2006 till 2011) and the population is all the listed companies in Tehran Stock Exchange. The sample was obtained by screening method includes 199 company. The results of hypotheses testing using panel data showed the probability of using of discretionary accruals in order to show profitable enterprise increases, when the company has loss before using earning management in Iranian market capital. The results also indicate that when the current company's profit is lower than the previous year's profit, the possibility of using the discretionary accruals increases to show positive changes in profitability. Thus, it can be announced that bad and also lower benefit from last year, are as two major driving of earnings management.Keywords: earning management, profit before applying earnings management, discretionary accruals. ISSN 2162-3082 2014 www.macrothink.org/ijafr 24 International Journal of Accounting and Financial Reporting IntroductionAccounting earnings consist of cash and accrual item and accruals are largely in control by management. Often, investors and executives believe companies that have good profitability trends and their benefits have no major changes, have more value and more predictability in compare with similar company. Also, according to agency theory, managers can also have the incentive to manipulate earnings to maximize their interests. This study attempted to examine the influence of both major drivers of earning management including: being bad company and also have lower benefit from previous year, in active Iranian market. Problem StatementStudies have shown that low volatility and stabilize profit, are indicative of its quality. Therefore, investors with more sure invest in the stock of the companies that their profit process is more stable. Earnings management is defined as public involvement management in process of determining profits that is in line with the desired objectives of management (Wild et al, 2001, p238).Corporate earnings management behavior has been studied and it has been linked with a measure of profitability includes profit and increase profits (Bourg AstalrandDichew,1997, p 106). They have concluded that lack of continue in profits to near zero and near-zero changes in earnings leads to managers manipulate they Earnings to report its Earnings or maintain previous year profits.Despite several studies that have been done in relation to earnings management, still whether or not to achieve the criteria by earnings manipulating are at least two reasons that remain unsolved. First, the claim that the presence of causal link between earnings management and profit criteria is based on reported earnings. Second, although the earnings discontinuity is visible, but regardless of the managerial manipulat...

Factors that Motivate The Act of Earnings Management

“…It means companies that have a high level of sales growth will attract the investors easily, but it will reduce the act of doing earnings management. On the other hand, Heidarpoor et al (2014) stated that there is a positive relationship between sales growth and earnings management, which also suggested by Gonzalez and Meca (2013). While, Savitri (2014) stated that sales growth does not influence on earnings management, which also suggested by Linasmi (2017).…”

Meeting Dividend Thresholds through Earnings Management: A Cross-cultural Comparison

“…Empirical results have suggested that to satisfy stakeholders, firms conduct evaluations to determine whether earnings thresholds, such as change in earnings above zero (Heidarpoor et al, 2014), positive earnings (Sun and Rath, 2012), and analyst forecasts (Athanasakou et al2011), as well as dividend thresholds are met (Daniel et al2008；Liu andEspahbodi, 2014;Dechow et al 2010b;Koren and Valentincic, 2013). Managers appear willing to expend considerable effort in avoiding dividend cuts (Lintner, 1956), because dividends are crucial to investors (Deangelo and DeAngelo, 2006a).…”

“…Sun and Rath (2012) demonstrated that firms are likely to avoid negative earnings through earnings management by using DAs. Moreover, Heidarpoor et al (2014) revealed that firms manage earnings to maintain a positive earnings change, and Athanasakou et al (2011) indicated that firms manage earnings to achieve analyst thresholds.…”