Indian Journal of Fundamental and Applied Life Sciences ISSN: 2231– 6345 (Online) An Open Access, Online International Journal Available at www.cibtech.org/sp.ed/jls/2014/04/jls.htm 2014 Vol. 4 (S4), pp. 2483-2491/Nafei and Ghanbari Research Article © Copyright 2014 | Centre for Info Bio Technology (CIBTech) 2483 STUDY THE RELATIONSHIP BETWEEN EQUITY COMPOSITION AND FIRM’S EARNINGS STABILITY IN TEHRAN SECURITIES EXCHANGE Parvin Nafei 1,2 and *Mehrdad Ghanbari 3 1 Department of Accounting, Ilam Science and Research Branch, Islamic Azad University, Ilam, Iran 2 Department of Accounting, Ilam Branch, Islamic Azad University, Ilam, Iran 3 Department of Accounting, Kermanshah Branch, Islamic Azad University, Kermanshah, Iran *Author for Correspondence ABSTRACT The purpose of this research is to study the relationship between equity composition and firm’s earnings stability in Tehran securities exchanges. This research is applied in terms of purpose, is descriptive- surveying in terms of method, and is correlation in terms of the relationship between variables. The statistical population of this research includes all Tehran listed firms. The number of firms is 480 that we selected 115 firms as statistical sample. We used 3 New Result software and information banks of Tehran securities exchange site for collecting data. We used annual reports and financial statements of Tehran listed firms for collecting data that are related to research hypotheses. Statistical analysis was conducted by E views soft ware. Finally, research hypotheses were tested by t test, F- Fisher and determination coefficient (R 2 ). Research findings show that there is not a meaningful relationship between equity composition and earnings stability when the variable of stock capital ratio is used as the alternative variable of equity composition, and there is a meaningful relationship between equity composition and earnings stability when one of the variables of aggregated earnings ratio, the ratio of legal savings and the ratio of arbitrary savings is used as the alternative variable of equity composition. Keywords: Equity Composition, Stock Capital, Aggregated Earnings, Legal Savings, Arbitrary Savings, Earnings Stability INTRODUCTION The occurrence of industrial revolution and its continuation in Europe of 19 th century, the establishment of large factories and the execution of great plans like the establishment of national railway network that required great monetary capitals led to the emergence of first stock companies. This new format (Stock company) was a suitable solution for providing huge capitals and distributing trade adventure. Growth and development of stock companies led to the emergence and increases of a class of owners who don’t run firms directly, but manage firms via the selection of board of directors (Shabahang, 1998). Stock holders as the owners of trade unit want to increase their wealth. According to this fact that the increase of wealth result results from the performance of trade unit the evaluation of trade unit is very important for owners (Nauravesh, 2004). One of the qualitative features of earnings is earnings stability. Financial analysts and investors don’t pay attention to accounting income in the determination of suture cash flows as the only determining index, but stability and repeatability of reported earnings are very important for them. According to the restrictions of information cost and their importance, it can be noted the more the reliability of information, the more useful information will be for users (Pareto and Pooryanasab, 2001). Theoretical Foundations Equity Equity is representative of the interests of institutions main owners towards net assets of institution. Equity shows the reminder interests of institutions main owners in institution assets after deduction the liabilities of that institution. In a trade institution equity generally shows the interests of the main owners of institution. In equity accounting, the following main purposes are followed: -determine capital resources of institution - determine legal and recorded capital - determine dividend that can be distributed among stock holders (Demori, 2011).