THE IMPACT OF EARNINGS MANAGEMENT ON THE VALUE RELEVANCE OF EARNINGS: EMPIRICAL EVIDENCE FROM TURKEY

Abstract

Author(s): A.Taylan ALTINTA?, Emre Sel癟uk SARI, Emir OTLUO?LU

This empirical study focus on demonstrating the relation between of earnings and stock returns by using data from Istanbul Stock Exchange of Turkey (Borsa Istanbul-BIST). This study analyzes the presence of earnings management practices by using financial information of the Turkish listed manufacturing companies. For this purpose, it was tested that low performance companies are prone to apply income increase practices than high performance companies. It was first approved that companies with low performance employ these practices. Thereafter it was examined if these earnings management practices decrease the value relevance of earnings. To test the hypothesis a model is created to present the relation between reported earnings and stock returns. Our findings display that low performance companies tend to increase their earnings so that they can hide their low performance. Our results point out that there is significant and positive relationship between earnings and market adjusted stock returns for whole sample, however there is no significant difference between adjusted market returns of high and low performance companies. In the literature, earnings management and value relevance studies are mostly based on US data. This study is the first paper that examines the relationship between earnings management, value relevance and financial performance in Turkish manufacturing companies.

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