How Earnings Management Affect Earnings Quality?

In this study we investigate the relationship between earnings management (EM) and four earnings attributes (as proxies of earnings quality). The four earnings attributes used in this study are accruals quality، earnings persistence، earnings predictability، and earnings smoothness. Especially we test opportunistic EM that predicts EM has unfavorable effects on various dimensions of accounting information quality. In order to test hypotheses the four earnings attributes and discretionary accruals (as as proxies of EM) are measured for 303 firms during 2002-2009 period (total 1530 firm-year observations). Results show that an increase in discretionary accruals is accompanied by decreases in magnitude of earnings attributes. Among those، accruals quality is more affected by earnings management than the other attributes. In order to determine definitive effects of earnings management on earnings quality، we used cost of stockholders’ equity to rank earnings attributes importance from investors’ perspective and to compute earnings quality score for each firm. Results show that discretionary accruals damage earnings quality.