The Effect of Real Activities Earnings Management on Credit Ratings of Firms Listed on Tehran Stock Exchange

The purpose of this research is to examine the relationship between real activities earnings management and credit ratings in a 76- member sample of firms listed on Tehran stock exchange during 1387 to 1393. Regarding the absence of international credit rating agencies in Iran's financial market, this paper firstly calculates credit ratings of selected firms using the emerging market score (EMS) model, then applies a multivariate regression in which dependent variable is credit rating and independent variables are abnormal cash flows from operations, abnormal production costs and abnormal discretionary expenditures. This research is an applied (in terms of objective) and descriptive (in terms of data collecting method) one that uses observational data. Results suggest that there is no relationship between abnormal cash flows from operations and credit rating, but abnormal production costs and abnormal discretionary expenditures, at 5% level, are significantly negatively related to credit ratings in Iran.
Key words: Credit Rating, EMS Model, Real Activities Earnings Management, Abnormal Discretionary Expenditures, Tehran Stock Exchange.