1706 Advances in Environmental Biology, 7(8): 1706-1712, 2013 ISSN 1995-0756 This is a refereed journal and all articles are professionally screened and reviewed ORIGINAL ARTICLE Corresponding Author AfsanehKalhor, Islamic Azad University, Financial Management, Kermanshah, Iran E-mail address: afi7star@yahoo.com Investigating the Relationship between Quality of Smoothed Profits and Non-systematic Risk in Tehran Stock Exchange Market 1 Zahra Amirhosseini, 2 Javad Mehrabi, 3 Afsaneh Kalhor 1 Islamic Azad University, Department of management, Tehran, Iran 2 Islamic Azad University, Financial Management, Kermanshah, Iran 3 Islamic Azad University, Financial Management, Kermanshah, Iran Zahra Amirhosseini, Javad Mehrabi, Afsaneh Kalhor: Investigating the Relationship between Quality of Smoothed Profits and Non-systematic Risk in Tehran Stock Exchange Market ABSTRACT In this study, the relationship between non-systematic risk and quality of smoothed profits in Tehran Stock Exchange has been empirically tested. From a practical point of view, the study is a descriptive correlation research, and the research data were collected ex post. Firms listed on the Tehran Stock Exchange where the sample of our research. The study period is from 2008 to 2012. The model used to estimate is panel of data. The results indicate that there is no significant relationship between non-systematic risk and high quality smoothed profits at a confidence level of 95%. The model also shows the significant relationship between non-systematic risk and low quality smoothed profits at a confidence level of 95%. Key words: Profit Quality, Profit Smoothing, Non-systematic Risk, Tehran Stock Exchange; Introduction Financial reports are considered as one of the most important products of accounting system whose major objective is to provide necessary data for the evaluation of performance, profit-making ability of companies and prediction of future cash flows. Net profit is one of the accounting items which is presented in the income statement. This item is calculated on an accrual basis and is influenced by accounting procedures selected by the manager. Investors are inclined to companies which take fewer risks and yield an adequate output. Since a company's market risk are measured by fluctuations of its stock and stock value is somehow related to each dividend, companies tend to reduce output fluctuations by reducing fluctuations in each dividend, and as a result influence investors and creditor's viewpoint of the company's risk. Therefore, companies smooth profits so that the flow of reported profit growth becomes constant. The present study endeavors to empirically examine the relationship between non-systematic risk and the quality of smoothed profits according to the comparative approach of high-quality profit companies and low- quality profit companies in the Tehran Stock Exchange Market. Statement of the Problem: Investors believe that low-quality profit is not desirable because it indicates a non-optimum allocation of resources. It is not efficient as it reduces economic growth through non-optimum allocation of resources. High-quality profit reduces capital costs by reducing data risk associated with the reduction of the cost of equity and increase of transactions. High- quality profit encourages investors to carry out investment. When investors ensure that companies enjoy a high-quality profit, they invest more on stocks and security [3]. There are several techniques to manage profits. One of them is smoothing the profit examined by numerous studies [17]. The present study focuses on profit smoothing as part of profit management for following reasons: first of all, profit smoothing companies can be easily identified from companies who do not deal with this. In addition, smoothing can be defined operationally. Profit smoothing is conducted in various companies whose sail is dependent on inflation and boom cycles. For instance inflation and boom years are specified in the construction sector. Sail prices are kept short sale during the boom years but they are introduced as sail during inflation years [12] Investors pay attention to profit quality and stock risk in investment and are always seeking high-quality profits [15]. The most important point in the present study is to investigate the kind of relationship between smooth profits and non-systematic risk. This study not only emphasizes smoothing and its effect