The Effect of Earnings Management on the Relationship between Earnings Forecast Error and Earning Persistence: Test of Management Overconfidence Theory

Document Type : Original Article


1 Ph.D Student, Department of Accounting, Science and Research branch , Islamic Azad University, Tehran, Iran

2 Associate professor, Department of Accounting, Science and Research Branch, Islamic Azad University, Tehran, Iran.

3 Professor, Department of Accounting ,Central Tehran branch, Islamic Azad Universit, Tehran, Iran


Earning is one of the most important accounting information as well as a criterion for assessing financial reporting and has always been considered by the various interest groups in the company. Because the change in the balance sheet figures occurs due to the change in the profit and loss statement figures. The existence of an accrual accounting basis has led investors and financial analysts to focus on the quality of their earnings in addition to reported earnings values in determining the company's value. Hence, earnings persistence is one of the important indicators of earnings quality. From the perspective of investors, the earnings that is more stable, the earning is defined by the quality. Therefore, managers as top-level organizations have the power and authority to make decisions and influence financial reporting. As a result of their opportunistic behavior with excessive earning manipulation and confidence, they rely on their own beliefs to reduce their reliance on information and reduce the quality of earning. In this regard, the present study first explores the relationship between the Earnings forecast error and earning persistence in earning management. Then, in the following, the effect management overconfidence on the above relationship has been examined over a 9-year period from 2009 to 2017 in 115 companies from listed companies in Tehran Stock Exchange. The results of this study show that there is a significant and positive relationship between Earnings forecast error and the earning persistence in earnings management, also the overconfidence has a different significant effect on them.


  • Etemadi, Hossein, Momeni, Mansour and Farajzadeh Dehkordi. (2012) “How does earnings management affect the quality of earnings of companies?”  Journal of Financial Accounting Research, Volume 2, pp. 122-101.
  • Izadinia, Nasser, Googerdchian, Ahmad and Tanbakooyi, Mojgan. (2014). “The Impact of Managerial Ability on Earnings Quality in Companies Listed in Tehran Stock Exchange”, Journal of Financial Accounting Research, No. 3, pp: 36-21. 
  • Izadinia, Nasser and Rasaeiyan, Amir. (2011).  “Mechanisms of Corporate Governance and earning Quality”. Empirical Financial Accounting Research Quarterly, First Year.  Issue 1, pp. 51-66
  • Bakhtaki, Behrouz. (2007).  “Earning Management by Changing the Classification of Profit and Loss Statement Items", M.Sc., Allameh Tabataba'i University.
  • Haghighat, Hamid-Bakhtiari, Masoud-Beheshtipour, Mohammad Taghi. (2011). “Ranking of Factors Affecting the Accuracy of Earnings Prediction of Companies Listed in Tehran Stock Exchange during Capital Increase”, Accounting and Auditing Reviews, Volume 18, No. 65, Pp. 62-41.
  • Haghighat, Hamid, Mousavi, Seyed Ahmad. (2007). “Investigating the Role of Sales Growth Factors and Financial Crisis Index in Predicting Stock Returns” Journal of Accounting and Auditing Reviews, No. 47, pp. 63-82.
  • Khoshtinat, Mohsen-Akbari, Morteza. (2008). “Evalution of Variable Affecting Management's Earnings Forecast Validity”, Journal of Accounting Studies, No. 19, pp. 49-21.
  • Sadat Mirshojaanbarani, Maryam & Amri, Omid. (2016). “Investigating the Impact of Management's Overconfidence on the Quality and Persistence of Earnings in Companies Listed in Tehran Stock Exchange” International Conference on New Ideas in Management, Economics and Accounting, Barcelona-Spain, October 22, 2016.
  • Foroughi, Dariush-Abbasi, Javad. (2011). “Investigating Factors Affecting Accounting Conservatism”, Quarterly Journal of Experimental Financial Accounting Research, No. 132-113.
  • Lotfi, Ahmad and Hajipour, Meysam. (2010). “Investigating the Effect of Conservatism on Management Error in Earning Prediction”, Journal of Management Accounting, No. 4, pp. 17-33.
  • Mansourfar, Gholamreza, Didar, Hamzeh and Hosseinpour, Vahid. (2015). “The Impact of Managerial Ability on Earnings Quality in Companies Listed in Tehran Stock Exchange”, Journal of Financial Accounting Research, No. 1, pp: 54-37.
  • Maham, Kayhan and Zolqadr, Mostafa. (2012).  “The Relationship of Earnings Expected by Earnings Management and Earnings Management, Issue 2, No 4, Summer 2012, pp. 65-87.
  • Yaghoubi Salehabadi, Rasool, BaniMahd, Bahman, Shokri, Azam. (2015).  “CEO and earning Quality: Horizon Problem Hypothesis Test”. Quarterly Journal of Accounting Knowledge and Management Audit / Issue 41 / Summer 2015
  • Abdullah Alsaadi, M. Shahid Ebrahim, Aziz Jaafar. (2017). “Corporate Social Responsibility, Shariah-Compliance, and Earnings Quality”. Journa Financ Serv Res. (2017) 51:169–194
  • Beaver, W., Lambert, R. and Morse, D. (1980). “The Information Content of Security Prices”. Journal of Accounting and Economics, 2 (1980): 3- 2.
  • Ben-David, I., Graham, J. R., and Harvey, C. R. (0222). “Managerial Overconfidence and Corporate Policies”, Working Paper, Duke University.
  • Beneish, M. D., and M. E., Vargus. (2002). “Insider Trading, Earnings Quality, and Accrual Mispricing”. The Accounting Review, 77 (4), 755–791.
  • Bliss, J. H. (1924). “Management through Accounts. New York, NY: The Roland Press Co.
  • Chang A. and Shiva K. (2010). “Earnings Management and Earnings Predictability”. www.ssrn, working paper.
  • Chronopoulos, Panagiotis I. and Siougle, Georgia. (2019). “Management Forecasts and the Persistence of Earnings and Earnings Components” (February 28, 2019). Available at SSRN:
  • Cohen, D.A. and P. Zarowi. (2010). “Accrual-based and Real Earnings Management Activities Around Seasoned Equity Offerings”.Journal of Accounting and Economics50 (1): 2-19
  • Crista, H.S Bouman. (2014). “Managerial Optimism and Earnings Smoothing”.
  • Dechow, P. and S.Ross. (2005). “The Persistence of Earnings and Cash Flows and The Role of Special Items, Implications for The Accrual Anomaly”, Working Paper, PP. 1-61,
  • Demerjian, P., Lev, B., Lewis, M. F., & S. E. McVay. (2013). “Managerial Ability and Earnings Quality”. The Accounting Review, Vol 88, No 2, Pp 463-498.
  • Deshmukh, S., Goel, A., and Howe, K. (2010). “CEO Overconfidence and Dividend Policy, Working Paper, DePaul University.
  • Feng Li, Indra Abeysekera, Shiguang Ma. (2014). “The Effect of Financial Status on Earnings Quality of Chinese listed companies”, Journal of Asia Pacific Business, Vol.15, No.2, pp.4-26.
  • Francis, J., Lafond, R., Olsoon, P. ND sChipper, K (2004). “Cost of Equity and Earning Attributes”. the Accounting Review, Vol. 79 (4): p 967-1010.
  • Francis, J., Olsson, P., & Schipper, K. (2008). “Earnings Quality. Foundations and Trends in Accounting”. 1(4), 259–340
  • Gong, G., Yue Li, L. and Xie, H. (2009). “The Association between Management Earning Forecast Errors and Accruals”. Accounting Review, Vol. 84, No. 2, PP. 497-530
  • Graham, J.R., and Harvey, C.R. (2010). “Managerial Miscalibration”. Working paper, Duke
  • Gramlich, J.D .and Sørensen, O. (2004). “Voluntary Management Earnings Forecasts and Discretionary Accruals: evidence from Danish IPOs”. European Accounting Review, 13(2):235.
  • Hajiha, Z. and Gilavi, M. (2012). “The Effect of Management Ability on Earning Persistence in Production Companies Listed in Tehran Stock Exchange”. European Journal of Economics, Finance and Administrative Sciences, Vol. 50, No. 1, Pp.88-99.
  • Han, I., Kim, B., Lee, J and Park, S. (2013). “Information Asymmetry and the Accrual Anomaly”. Electronic Copy Available at:
  • Ho, Chao-Rung, & Chang, Yuanchen. (2009). “CEO Overconfidence and Corporate Financial Distress”., August 15, 2009.
  • Hribar, Paul and Yang, Holly I. (2016). “CEO Overconfidence and Management Forecasting”. Research Collection School of Accountancy. Part of the Accounting Commons
  • Huang, W., Jiang, F., Liu, ZH. Zhang, M., (2011). “Agency Cost, Top Executives’ Overconfidence, and Investment-Cash Flow Sensitivity - Evidence from Listed Companies in China Pacific-Basin”. Finance Journal 19 ,261–277
  • Jog, V., & McConomy, B. (2003). “Voluntary Disclosure of Management Earnings Forecasts in IPO Prospectuses”. Journal of Business, Finance & Accounting, 30(1) (2), pp. 125-167. 91.
  • Kothari, S.P., Leone, A.J., Wasley, C.E. (2005). “Performance Matched Discretionary Accrual Measures”. J. Account. Econ. 39, PP. 163–197.
  • Li, F. & Abeysekera, I. & Ma, S. (2011). “Earnings Management and the Effect of Earnings Quality in Relation to Stress Level and Bankruptcy Level of Chinese Listed Firms. Corporate Ownership”
  • Li, V. (2019). “The Effect of Real Earnings Management on the Persistence and Informativeness of Earnings”. The British Accounting Review, doi:
  • Moon Jr., J. R. (2014). “Accruals quality, disclosure costs, and management forecast activity”. Available at:
  • Penman, S.Zhang, X. (2002). “Accounting Conservatism, the Quality of Earning, and Stock Returns”. The Accounting Review , VoL.77,NO.2,237-264
  • Pompian, M.M. (2006). “Behavioral Finance and Wealth Management, Translated by: Ahmad Badri, Kayhan Publishers”.Review and Framworks, “Accounting Horizon, Vol. 22 No. 3, pp. 315-338.
  • Roll, R. (1986). “The Hubris Hypothesis of Corporate Takeovers”. The Journal of Business 59: 197–216.
  • Roychowdhury, S., (2006). “Earnings Management through Real Activities Manipulation”. J. Account. Econ, 42,PP. 335-370
  • Sanjaya, P.S. and Saragih, M.F. (2012). “The Effect of Real Activities Manipulation on Accrual Earnings Management: The Case in Indonesia Stock Exchange (IDX) ”. Journal of Modern Accounting and Auditing, Vol. 8, No. 9, 1291-1300
  • Skala, D. (2008). “Overconfidence in Dsychology and Finance an Interdisciplinary Literature Review”. Banki kredyt 4: 33-50.
  • Sun, Y, Xu, W. (2012). “The Role of Accounting Conservatism in Management Forecast bias”, Journal of Contemporary Accounting&Economics, 12.05.002
  • Tomak, S, (2013). “The Impact of Overconfidence on Capital Structure in Turkey” International Journal of Economics and Financial Issues, vol.3, No.2.
  • Tomy R.E. (2012). “Earnings Persistence over the Business Cycle”. Working paper. Stanford University.
  • Zabihollah Rezaee, Ling Tuo. (2017). “Are the Quantity and Quality of Sustainability Disclosures Associated with the Innate and Discretionary Earnings Quality? , Springer Science+Business Media Dordrecht 2017
  • Zang, A. Y. (2012). “Evidence on the Tradeoff between Real Activities Manipulation and Accrual Based Earnings Management”.The Accounting Review87 (2): 675-703.