Recognition of Earnings Management Using Changes in Asset Turnover and Profit Margin

Abstract

The aim of this research is to recognize earnings management of the firms listed in Tehran Stock Exchange using changes in asset turnover (ATO) and profit margin (PM). ATO/PM model and Jones adjusted abnormal accruals model have been used to recognize upward and downward earnings management. Statistical population contains 133 firms during 2004-2011. The correlations tests, the mean equality tests such as t-student & Welch, and also panel/pooled regression models have been used to test the research hypotheses. Findings indicate that contemporaneous increases in PM and decreases in ATO cannot be as a recognizer of upward earnings management, and also contemporaneous decreases in PM and increases in ATO cannot be as a recognizer of downward earnings management. Also, results show that Jones adjusted abnormal accruals model as compared to ATO/PM model has incremental and greater relative information content in recognition of earnings management.

Keywords

• Earnings Management
• asset turnover
• profit margin
• abnormal accruals items model