Investigating the Relationship between the Probability of Bankruptcy and Firmsʹʹ Intentional Income Smoothing in Tehran Stock Exchange

Abstract: Using a Regression model and through Panel data method, the essay wanted to examine the relationship between intentional income smoothing components and bankruptcy. To this aim, 81 distressed firmsʹ financial data is gathered from Tehran stock exchange for the period of 1999-2008, to test the research hypotheses; first the probability of bankruptcy was assessed through the prediction model of Zavgren. Then real income smoothing was measured through Mean of Absolute Value of the percentage of real income deviations from its Trend; and artificial income smoothing was also measured by the model of Eckel at the levels of gross and operational profits. The results indicate that there is a relatively strong and direct correlation between the research variables. This means that managers of bankrupt enterprises (that are subject to the amended article 141of trade law) have a high inclination toward intentional income smoothing so that to magnify the firmʹs performance.