The Effect of Accruals Quality on the Incentive Contracting Role of Earnings in Tehran’s Stock Market

Abstract

In this paper, the effect of accruals quality on the role of profit in negotiating an incentive contract has been examined. For this purpose, a sample that contains 153 accepted companies in stock market since 2003 until 2010 has been considered. For measuring the total accruals quality, method of Dechow and Dichev (2002) has been used. According to Francis et al (2005) the accruals have been separated in optional and compulsory components. Additionally, for testing hypothesis the two methods of multivariate linear regression from Peng (2011) have been used, adopting the method of combined data. The results showed that the quality of accruals has no significant relationship whith usefulness of profit for negotiating incentive contracts neither in total level nor in level of each optional or compulsory component. Nevertheless, quality of accruals in total level and in levels of each optional or compulsory component has a direct relationship with the changes in director’s reward. Also, the other results of the research have showed that stability and informational content of the profit have a direct relationship whit the usefulness of profit for negotiating incentive contracts.