Test of Functional Fixation Hypothesis; Case of Net Operating Assets (Bloated Balance Sheet)

In this paper the functional fixation hypothesis is tested from investors’ viewpoint of net operating assets (bloated balance sheet phenomena). The study is at firm level in Tehran Stock Exchange using the data of 153 firms for 7 years (1382- 1389). The functional fixation hypothesis states that If investors with limited attention focus on accounting profitability, and neglect information about cash profitability, then net operating assets, the cumulative difference between operating income and free cash flow, measures the extent to which reporting outcomes provoke over-optimism. Our findings from Univariate and Multivariate regressions show that the hypothesis is accepted based on multivariate test and is rejected based on univariate test. These findings show that with control variables consideration bloated balance sheet affect investor decision process in Iran, too.