The Effect of Financial Status on Earnings Persistence, Predictability and Smoothing

Profit as the product of accounting information system must be of acceptable quality. Earnings quality is a broad concept with different dimensions. The aim of this study was to compare some measures of earnings quality in healthy and bankrupt companies. This paper investigates the relation between accounting-based earnings quality attributes and the financial status of Iranian companies listed in Tehran Stock Exchange from 2010 to 2012 by classifying them as either ‘healthy’ or ‘bankrupt’ firms. In this regard, companies divided into three categories according to the Altman Z Index (healthy, financially distressed and bankrupt) and then were compared with each other three measures of earnings quality (persistence, predictability and smoothing) in healthy and bankrupt firms. The findings from the study show that the persistence and predictability of earnings in bankrupt companies more healthy companies, As a result, earnings quality of bankrupt companies in terms of persistence is higher than healthy companies but in terms of predictability is lower than the healthy companies. The results suggest that the smoothing in the healthy companies is more than the bankrupt companies, and this means that the quality of earnings in terms of smoothing in the bankrupt companies is higher than healthy companies.