Abstract

The purpose of this paper is to investigate the interaction of conditional conservatism with income smoothing in Tehran Stock Exchange. In order to test the hypotheses, 117 firms were selected during 2001 to 2009. We use Eckel (1981) model to classify smoothing and no smoothing firms and then we apply Ball and Shivakumar (2005) type measures of conditional conservatism on each group. The results indicate that the smoothing firms in Tehran Stock Exchange use the veil of conservative accounting to manage earnings. In fact managers in smoothing firms in comparison to no smoothing firms have incentive to smooth earning downwards, toward conservatism so it casts doubt on the ability of accounting conservatism to constrain managers’ opportunistic behavior.

Key words: Income smoothing, earnings management, conditional accounting conservatism, aggressive accounting.