The Impact of Earnings Management On The Value Relevance Of Earnings: Empirical Evidence From Turkey

Abstract

This empirical study focus on demonstrating the relation between of earnings and stock returns by using data from IstanbulStock Exchange of Turkey (Borsa Istanbul-BIST). This study analyzes the presence of earnings management practices by using financialinformation of the Turkish listed manufacturing companies. For this purpose, it was tested that low performance companies are proneto apply income increase practices than high performance companies. It was first approved that companies with low performanceemploy these practices. Thereafter it was examined if these earnings management practices decrease the value relevance of earnings. Totest the hypothesis a model is created to present the relation between reported earnings and stock returns. Our findings display that lowperformance companies tend to increase their earnings so that they can hide their low performance. Our results point out that there issignificant and positive relationship between earnings and market adjusted stock returns for whole sample, however there is nosignificant difference between adjusted market returns of high and low performance companies. In the literature, earnings managementand value relevance studies are mostly based on US data. This study is the first paper that examines the relationship between earningsmanagement, value relevance and financial performance in Turkish manufacturing companies.