Earnings Management in Listed Firms and Unlisted Subsidiaries

Prior studies reveal that earnings manipulation by managers is one of the main concerns of investors in Tehran Stock Exchange (TSE). Extant theoretical and empirical evidence indicate that incentives of managers in relation to earnings manipulation can be different in a listed firm compared to an unlisted firm. There are two conflicting views in this area. "Demand" view suggests that earnings quality of listed firms is superior; however, the prediction of "opportunistic behaviour "view goes against it. Since there is no sufficient evidence in this area and Codal website provides disclosures of annual reports of unlisted firms as subsidiaries of firms listed in TSE, this study examines the possible differences of earnings management of listed firms and their unlisted subsidiaries over the period from 2011 to 2015. Results indicate that there is no significant relation between firm types (unlisted vs. listed) and both earning management through absolute discretionary accruals (based on three different model) and upward earnings management. Findings show that since the annual reports of unlisted firms like listed firms in TSE have been disclosed to the public, the incentives of managers and auditors of unlisted firms are similar to those of listed firms.