The Relationship between Earnings Management Patterns with Investors’ Sentiment

Today, the sentiment of investors from the economic perspective of companies becomes the center of attraction. Since earnings play a significant role in attracting investors' attention, managers are always motivated to manage it. Therefore, the way earnings management’s incentives are affected by investors’ sentiment and the mechanism through which earnings management pattern affects the investors’ sentiment comes as an interesting issue. In this study, the relationship between earnings management patterns with investors’ sentiment is investigated. Investors’ sentiment is measured using factor analysis of the capital market’s performance variables and earnings management measured by  accruals and real earnings management models. The population of this study consists of companies listed on the Tehran Stock Exchange (TSE) and the sample is selected by imposing some restrictions on listed companies during the period of 2006 to 2017. The research hypotheses are tested using estimated generalized least squares (EGLS) method. The result shows that there is a negative relationship between accrual based earnings management and investors’ sentiment. In other words, it seems that investors pay more attention to accruals when their sentiment of the market is negative which motivates managers to apply accrual based earnings management.  However, there is a positive relationship between investors’ sentiment and real earnings management. Thus, managers are encouraged to apply real earnings management when the investor’s sentiment is positive; on the other words, investors rely more on the earnings are managed through real activities when their sentiment of the market is positive.