Our study investigates the relationship between the operating performance of Iranian industrial firms registered in Tehran Stock Exchange (TSE) and the behavior of discretionary accruals during the period of 1379-1382. We hypothesize that the degree of earnings management will depend on the firm operating performance. For this purpose, we construct 12 "cash from operations (CFO)" portfolios to test if there are systematic differences in discretionary accruals across portfolios. Three test methods (a mean accrual test, a correlation test, and a regression analysis) are used to investigate if operating performances affect discretionary accruals differently.
The results support the hypothesis that Iranian industrial firms registered in TSE manage earnings. When operating performance is poor, the firms tend to choose income-increasing strategies, while, the well performing firms tend to select income-decreasing strategies as a whole. But, investigating individual portfolios shows that some of very performing firms tend to select income-increasing strategies.