Estimate of Probability of Loss Reversal in Listed Companies in Tehran Stock Exchange

One of the main objectives of financial accounting is to provide information for financial analysts to decide on economic issues. Loss firms’ investors are always faced with this decisions to continue or leave their investment in the loss firms. These decisions are directly affected by their assessment of likely to be profitable loss firm in future periods. This study aims to develop a model of the loss reversal, through which can be calculated the possible to profitable loss reversal with information disclosed by listed companies in Tehran Stock Exchange. In particular, weve tested the accuracy of prediction adjusted models loss reversal to the level of its effectiveness to be invoked as a tool to analyze the financial statements.
Research Hypotheses: H1: The likelihood of loss firms becoming profitable in the following period is negatively associated with firms’ reported level of specialized investment assets.
H2: The likelihood of loss firms becoming profitable in the following period is negatively associated with firms’ past and current level of accounting conservatism
The JP model was adopted and extended in order to examine the hypotheses. Specifically, variables measuring loss firms’ investment in specialized assets, capital expenditures and level of accounting conservatism were included in the JP model as additional explanatory variables. The modified JP model models one-year-ahead loss reversal on current and past accounting information. It is stated as follow:

Results indicate that a particular investment is likely to make the company experience a further loss of continuity. Accounting conservatism, as well as a regular feature of financial reporting, is positively related to future loss reversal.
Discussion and Investors of loss firms face abandonment decision based on their assessment of the probability of future loss reversal. This research examined factors that are associated with the likelihood of future loss reversal for Iranian loss firms.
This research has several implications. First, Iranian investors can adopt a set of accounting factors developed in the literature to assess the likelihood of future loss reversal in the Iranian market. These factors cover loss firms’ past performance, loss patterns, dividend payment and reported tax items. Second, given the high incidence of loss firms that are investment intensive (Darrough and Ye, 2007; Wu et al., 2010), loss firms’ investment activities indicating the different stages of investment may be exploited in assessing the likelihood of future loss reversal. Investors should consider lowering their expectation.
Given the prevalence and diversity of loss firms in the Iranian market, future research can expand the set of factors useful in predicting future loss reversal. The current research examines the probability of loss reversal. Future research can investigate the probability of loss reversal in the longer term.
This calls for the development of industry specific loss reversal models in future studies. Another possible research direction relates to investors’ expectation of loss reversal. As shown in prior literature, there are factors such as analyst coverage that could potentially mitigate the underestimation of loss persistence. Future research can explore this arena.