Investigating the Relationship between Earning Quality and Stock Rate of Return: Listed Companies in TSE

Although reported earnings of companies is considered the most important factor for decision- making in capital market; however, things such as assessments, varied accounting methods,smooting of income and earning management in making process threatens its informative role as an important basis for decision- making in capital market. Since varied criteria for measuring earning quality are presented and employed, this research is trying to find and propose a unified set of criteria for proper quantity measurement as well as identifying its relationship with the stock return of the companies accepted in Tehran Stock Exchange. Since there is no single method of measuring earning quality accepted by all researchers, the researcher has studied fifteen current researches to attain a comprehensive index. According to the evaluation indices used in the above mentioned researches, ten common criteria which were accepted to the majority of researchers (according to the highest number of occurrences, and also the possibility of studying them in Tehran Stock Exchange) were selected. Research hypothesis concerning a significant relationship between earning quality (independent variable) and stock return was examined at three levels of High, Medium, and Low profit quality. Thorough review of the research hypotheses through regression analysis of the data of the period 2001-2006 revealed that there is a significant relationship between stock return and earning quality in high, medium, and low levels. It is concluded therefore that investors are attentive to earning quality and changes in stock prices and as the result the stock return are both influenced by the earning quality criterion. The relationship observed is a linear relationship.