The Effects of Stagflation on Real and Accrual-based Earnings Management

In recent years, economic sanctions resulted in intense stagflation in Iran. Such heavy sanctions lead to a significant decline in profitability of Iranian firms. Decline in the firms’ profitability is likely to motivate managers to engage in earnings management. However, there is scant evidence regarding the effects of such macro-economic issue on financial reporting quality by firms. Hence, the present study investigates the effects of stagflation on earnings management. To test research hypotheses, 780 firm-year observations were collected from annual reports of firms listed on Tehran Stock Exchange between 2009 and 2013. The results of multivariate analysis reveal that stagflation has a positive relationship with both real and accrual-based earnings management. That is, Iranian firms manipulated earnings in stagflation period (2012 and 2013). Additional tests indicate that up-ward accrual-based earnings management occurred in stagflation period. The findings of this study support signaling theory interpretation in relation to earnings management in stagflation period.