Earning Management to Achieve Cognitive Reference points

Previous studies have shown that companie's managers tend to round-up the first digit of reported earnings. According to these studies, this type of behavior is inspired by the existence of the so-called 199 Toumans phenomenon, where a good with smaller first left digit is perceived as being abnormally lower than the other goods. In the current study, we try to determine whether managers of Iranian listed companies in TSE, also engage in this type of earnings rounding-up behavior? Is incidence of this type of earnings rounding-up behavior related to specific company characteristics (size, level of debt rate & degree with operating performance)? In this research we aimed to compare the observed and expected frequencies for the second left digit in reported earnings of Iranian listed companies. In this study, financial statements data of 245 Iranian listed companies in 1387 and financial statements data of the same companies between 1377-1388 was analyzed. To accomplish this research we designed two hypotheses are set testing them by using Benford’s Law as expected frequencies. The results suggest that managers of Iranian listed companies dont tend to round-up reported operating income, in a way that increases the first digit by one, when they are faced with a nine in the second left digit. While testing this behavior by net income of companies offers more relevant result. Furthermore, the large companies and the companies with lesser degree of operating performance have more tendencies to do this behavior in net income.