Abstract

This research aims to provide empirical evidence whether investors in the Iranian capital market rationally or naively interpret information content of discretionary accruals. To do this, information about 79 companies listed in Tehran Stock Exchange during the years 1379 to 1388 have been collected and analyzed. The study founds the following: 1) Stock prices can predict future profitability in Iranian companies; current profitability has incremental information relative to stock prices when predicting future profitability; discretionary accruals have incremental information content to current profitability and stock prices when predicting future profitability; and 2) Discretionary accruals are associated with the level of systematic risks and are associated with the level of insolvency risks. Thus, the level of discretionary accruals should have impact on the market valuation of company risk (naive investor hypothesis).