The impact of financial conditions on earnings quality of companies listed in Tehran Stock Exchange

Author Name(s): Fatemeh Heydari, Hossein Nourani*
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Abstract

This study seeks to find an answer for the question if financial conditions have impact on earnings quality (quality of accruals, earnings stability, earnings predictability, and earnings smoothness) in companies listed in the Tehran Stock Exchange. To test the hypotheses, 118 companies among the companies listed in the Tehran Stock Exchange during 2006 to 2014 were selected. Data needed to evaluate research variables were extracted from databases of “Tadbirpardaz” and “Rahavard-e Novin”. Analyses results shows that the financial conditions have significant impact on accruals quality of companies listed in stock exchange. In this regard, according to the findings of this study, it is recommended for capital market participants, decision makers, analysts and potential investors in Tehran Stock Exchange to pay attention to quality of earnings in addition to quantify the earnings in their decisions and to consider the relationship between financial conditions and earnings quality of company.

KeyWords

financial conditions, earnings quality, earnings stability, earnings smoothing, earnings, accruals quality

Introduction

Accounting erarnings quality and its relevance to predicted goals and valuation depend on the stability of its components. Achieving to stable earnings is effective in increasing the predictive power of investors and reducing the company’s risk. Some elements of earnings are reasonably stable over time. Disclosure of these stable elements of earnings assists consumers in predicting future payments related to these items. Other elements of earnings may be largely unstable. Information related to these elements should be reported in such a way that users can distingush their effects from the the effects of elements that have stability. Financial analysts are trying to assess the outlook of companies’ earnings. Earnings’ outlook refers to combinition of desired and undesired characteristics of net profit, for example, the company with stable elements and items in their earnings will have higher earnings quality compared to companies without these items and elements. This allows analysts to predict the future earnings of the company with greater reliability (Ismaili, 2007, 8).

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