The Impact of Earnings Management upon the Reaction of Market to the Extraordinary Gains

This study deals with the impact of earnings management upon the reaction of market to the extraordinary gains. Excessive earnings management prevents investors from forming logical expectations about the future perspective of the company. Consequently, the accrued interest fails to convey the relevant information about the stocks value to the shareholders. In such instances, the accounting earnings may reflect the manager's personal interests or a biased analysis by analysts leading to incorrect pricing on the market. In order to conduct an empirical investigation of this issue, the data concerning 810 companies accepted for Tehran SEC from 2002 to 2009 were analyzed. The findings indicated that investors in companies with increased earnings due to the earnings management showed a milder reaction to the extraordinary gains than companies that had not managed their earnings. This was the reverse with companies whose earnings management efforts resulted in a decrease in earnings.