conditional conservatism

The purpose of this research is to investigate the relationship between institutional investor inattention, accruals quality and conditional conservatism.

This research is applied and correlational. The data used are historical and ex-post and to test the research hypotheses, EViews 10 was used. The statistical population of this research is 438 companies from 2010 to 2019, which were listed during this period, and by applying the systematic elimination method, the number of the research population was reduced to 132 companies (1320 years - companies).

The findings of the research show that there is a significant negative relationship between institutional investor inattention and conditional conservatism, and there is a significant positive relationship between institutional investor inattention and the low portion of accruals quality. In addition, the relationship between the institutional investor inattention and the low portion of accruals quality (discretionary accrual items) shows that in the case of institutional investor inattention, the amount of optional accrual items (abnormal accrual items) increases and as a result, the earning quality decreases.

Originality: 

Institutional investor inattention and reducing their supervisory role, abnormal accruals (low portion of accruals quality) will increase and as a result, the earning quality will decrease. If institutional investors use their supervisory position well, they can prevent the presentation of manipulated earnings and dishonest expression.

Investors make investments according to the available information, including the information in the financial statements. Good news causes investors to react positively and bad news causes investors to react negatively. The concern of discovering the relationship between return on equity and unexpected profit has led to the creation of the concept of profit reaction coefficient. Since the first published research on profit reaction coefficient, one of the most important directions of studies conducted in the field of financial accounting is about explaining and identifying different factors affecting the profit reaction coefficient for different companies. Therefore, the purpose of this study is the effect of conditional conservatism and the comparability of financial statements on the profit reaction coefficient. The statistical population of the research companies admitted to the Tehran Stock Exchange and the studied sample includes 152 admitted companies during the years 1397 to 1401. The research method is descriptive and correlational in terms of the relationship between variables, and it is applied in terms of purpose and post-event in terms of event. The regression method and panel data as well as the fixed effects model were used to process and test the hypotheses. The results obtained from the data analysis show that the comparability of financial statements has a positive and significant effect on the profit reaction coefficient and conditional conservatism has a positive and significant effect on the profit reaction coefficient.

The existence of debt contracts and market monitoring on companies with higher financial leverage, as well as the funds used to repay debts and pay dividends, will cause relative decrease in the demand for conservatism and adjust the relationship between conservatism and excess cash. Therefore, the main goal of the current research is to investigate the relationship between excess cash and conditional conservatism with emphasis on the moderating role of net cash returned to debtholders and equityholders. To achieve the purpose of the research, a statistical sample including 140 companies listed on the Tehran Stock Exchange (980 firm-year) during the years 2015 to 2021 has been selected. Combined data analysis and generalized least squares regression were used to test the research hypotheses.The results show that excess cash has a direct and significant relationship with conservatism. Also, the results show the moderating effect of funds paid to Equityholders on the positive relationship between excess cash and conservatism. In other words, the direct effect of excess cash on conservatism in companies that pay more cash to Equityholders is less compared to other companies. But the findings do not confirm the variable role of funds paid to debtholders on the relationship between excess cash and conservatism.

The purpose of this research is to investigate the relationship between conditional conservatism and social responsibility of companies listed on the Tehran Stock Exchange. For this purpose, in this research, four measures of disclosure of information related to employee relations, disclosure of information related to social participation, disclosure of information related to production, and disclosure of information related to the environment were considered as dependent variables. The statistical population of the current research is the companies active in the Tehran Stock Exchange. For this purpose, 87 companies were selected between 1394-1398. In this research, multivariate regression analysis using mixed data method with fixed effects was used to examine the hypotheses. The research results show that there is a positive and significant relationship between conditional conservatism and social responsibility criteria.

Due to contractual demands, litigation costs and legal preferences in banks, the role of conditional conservatism is important in order to increase banking transparency. Also, in the conditions of information asymmetry and financial distress, uncertainty about the quality of loans is reduced, bank managers try to reduce agency costs by increasing the quality of information through conservative reporting and increasing the informing about banks real value. Based on this, the aim of the research is to investigate the effect of information asymmetry and financial distress on relationship between accounting conservatism and loan quality portfolio in Iran's banking system. For this purpose, the data of 15 banks accepted in the Iranian capital market between 2012 and 2020 have been used. The analysis of the results using multiple regression showed that conditional conservatism has increased the loan quality portfolio (increasing the quality of bank assets and reducing the ratio of non-current claims), and informational asymmetry and financial distress with a positive effect have modified and intensified the relationship between conditional conservatism and loan quality portfolio.

The purpose of this research is to determine the relationship between real profit management and accrual profit management with accounting conservatism. In this research, accounting conservatism has been measured using the model of Khan and Watts (2009). Real profit management has been measured using Roy Chowdhury's (2006) model integrated index. The current research is applied in terms of purpose and a posteriori in terms of methodology. The statistical population is the companies admitted to the Tehran Stock Exchange and 130 companies have been included in the statistical sample with the purposeful sampling method. The research period is 1994-1998. Regression analysis has been used to test the hypotheses. The results show that real earnings management has an inverse relationship with accounting conservatism, but accrual earnings management has no significant relationship with accounting conservatism.

Accounting Conservatism and risk disclosure are two information policies that managers can use to transfer business uncertainties to external users. Managers are expected to coordinate their reporting and disclosure choices by considering the cost and benefit of these two choices when making financial reporting decisions and coordinate or trade off the two options of conservatism and risk disclosure. This study investigated the relationship between conditional conservatism and risk disclosure. It also analyzed the effect of the factors of the level of debt financing needs and the manager's overconfidence by using a multiple regression model based on the sample of 87 companies listed on the Tehran stock exchange for the period of 2011 to 2020. The results indicate that managers use conditional conservatism and risk disclosure as two complementary information policies to reduce information asymmetry and agency costs. By applying more Conditional conservatism, managers improve the level of risk disclosure in proportion to the level of uncertainty perceived through risk disclosure by users to maintain consistency between quantitative and qualitative information. The debt financing needs has a negative and significant effect, and the overconfidence characteristic of managers has no significant effect on the relationship between the level of conditional conservatism and the level of risk disclosure of firms. Companies with a higher debt financing needs use more conditional conservatism than risk disclosure to reduce debt Costs. The results show that the relative costs and benefits of conservative reporting and risk disclosure affect financial reporting policies regarding risks and uncertainties.

Investment is known to be as one of the most important ways to expand the scope of companies’ operations and prevent them from being recessed and falling into downturn.  If the level of company’s investments is proportional to financial and operational policies, it would create value for the company and increase the stock value of the company.One of the factors affecting these two parameters, that are the level of investment and the stock value, is the conservatism principle. Therefore, this research is aimed to study the effect of conditional and unconditional conservatism on the level of future investment and stock value.In this regard, the financial data of 129 companies for a nine years period from March 20th 2008 till March 20th 2017 was used as combined data. To analyze the data, multivariate regression was used. Research findings suggest that business entities who implement a high level of conditional conservatism, do a lower level of investment. While business entities who implement a high level of unconditional conservatism have a higher level of investment. Another finding of the research suggests that the conditional and unconditional level of conservatism amplify the impact of the company's investment on stock value. The results of this research can be explained in the view of conservative contract theory and the theory of information asymmetry.

The high volume of free cash flow in a business unit can intensify the conflict and mismatch between the interests of managers and shareholders and, consequently, increase the problems of representation between managers and shareholders. Therefore, increasing free cash flows and the consequent tendency of managers to make inefficient use of available resources can increase agency problems, which referred to as free cash flow agency costs. On the other hand, the need for conservative reporting allows the losses from over-investment to identify sooner. Hence, the level of conditional conservatism will increase with increasing representation costs due to free cash flows. The main purpose of this study is to investigate the relationship between the representation costs of free cash flows (surplus or surplus cash) and conditional conservatism in the Tehran Stock Exchange. The results of  tests on 140 listed companies in the Tehran Stock Exchange during the period 2013 to 2018 indicate that there is a positive and significant relationship between additional cash (free cash flow representation costs) and conditional conservatism. In fact, the results showed that the costs of free cash flow representation have a positive effect on conditional conservatism.

Because conservatism in financial statements is applied primarily through the adjustment of accruals, conservative research has largely examined the impact of aspects of this feature on changes in accruals. The role of accruals is primarily to improve cash flow fluctuations. In conservative research based on accruals, typically several economic components of accruals such as sales growth, gross assets, machinery and equipment in the Jones model, and components such as multi-period cash flows in the Dichau and Dicho models Used. Bushman et al. And Allen et al. Improved the two models by combining the above two models. Byzalov and Basu also helped improve these models by breaking down bad news indicators into more detailed components. Therefore, the purpose of this study is to investigate the effect of bad news from other components of company sales, such as product group sales, fourth quarter sales and the company's share of industry, on conditional conservatism in accrual-based models 

To achieve the objectives of this research, data from 144 companies from manufacturing companies listed on the Tehran Stock Exchange for 11 years from 2006 to 2016 using Rahavardnovin software, Kodal site and the site of research, development and Islamic studies of the stock exchange, it was gathered. And the relationships between the research variables were analyzed using panel data and the generalized least squares method. 

The findings of this study showed that the decrease in sales of the product group and the decrease in sales in the fourth quarter increase conservatism in accruals, because the decrease in these indicators gives signals to the company about the possibility of future sales decline. ; But the decline in the company's share of industry sales has not had a significant effect on the conservative behavior of managers and accountants. 

In evaluating working capital accruals, managers, in addition to the bad news caused by the decline in the company's overall sales, also pay attention to the analysis of sales decline of each product group in the evaluation of accruals, and if they see a decrease in sales in some product groups, They evaluate their inventory of these products for the next period with more conservatism. Also, if sales are declining for the fourth quarter, it is likely that the decline will continue in the next financial period, resulting in a lack of timely sale of available inventories at the end of the fiscal year, and the company is likely to devalue inventories. On the other hand, it seems that due to the lack of strong competition in the Iranian market and the limited available markets, managers pay more attention to sales changes and do not pay attention to changes in sales share in the industry, as a benchmark and predictive indicator of the future.

The main purpose of this study is to evaluate the role of the firm's life cycle in measuring conservatism based on some conditional conservatism models. The statistical population of the study is 2008-2009, which includes a random sample of 180 company observations that were divided into three stages of life cycle using Dickinson's (2011) model variables. Multivariate regression technique with cross-sectional data was used to test the hypotheses. Then, using the initial models of conservative measurement, the error values ​​of each model were compared with the error values ​​obtained from the life cycle-adjusted models. The results show that the coefficients of determination in Dichfang modified model are not significantly higher than the original model. However, in the wing models of Shivakumar and Khan Watts, the increase of the coefficient of determination is significant compared to the original model. Therefore, except for the Duchess Tung model, in the other two models, the inclusion of life cycle in the model increases the prediction power of the models.

Subject and Purpose of the Article:

 One of the most important factors in achieving comprehensible information is that one can read it correctly and process it easily while reading. This capability is referred to as readability in the theoretical foundations of the last decade. The readability of financial reports is one of the important factors influencing investors' decisions. On the other hand, conservatism in financial reporting has a historical role in the selection and application of accounting principles and practices and may affect the readability of financial reports. Therefore, this study seeks to study the relationship between conditional and unconditional working environment with financial reporting readability.

The data of 59 companies during the years 2012 to 2019 were tested by combined data analysis method.

The results of the hypothesis testing showed that conditional and unconditional conservatism have a negative and significant  relationship with financial reporting readiness which effect of conditional conservatism has been greater. Conclusion, 

Originality and its Contribution to the Knowledge:

The results of this study double the need to pay attention to the concept of conservatism and the ability to understand financial reports in the public sector.

Risk management is one of the most important tasks of managers. On the one hand, risk-taking leads to increased competitive advantage, and on the other hand, according to the modern portfolio theory, increased risk leads to potential negative fluctuations in return on investment. Once the level of a firm's investments is commensurate with the appropriate level of risk, it can create value for the company. Conditional and unconditional conservatism can each reduce or increase risk because of their characteristics. Therefore, the purpose of the present study is to investigate the impact of firm investment on future stock return volatility considering the moderating effect of conditional and unconditional conservatism. In this regard, the financial information of 129 companies by Using the systematic removal method for the period 2009-2017 was used as combined data. Multivariate regression was used to analyze the data. The findings of the study suggest that conditional conservatism has a negative impact on the firm's future investment. Also, unconditional conservatism has a positive impact on the company's future investment. Other findings suggest that conditional conservatism has a negative impact on the relationship between firm investment and stock return volatility. Finally, unconditional conservatism has a positive effect on the relationship between firm investment and future stock return volatility.

Traditional discretionary accrual models such as modified Jones assumes a linear relationship between sales changes and accruals. Recent studies show that sales changes have an asymmetry effect on accruals; meaning that accruals and its components fall less for sales decreases than they rise for equal sales increases and this leads to an asymmetry. The aim of this research is to investigate the accruals and its components sensitivity on the operating asymmetry caused by sales changes and the effect of conditional conservatism on this relationship. This research is applied in terms of purpose and descriptive-correlation in nature. The research sample includes 180 companies listed on Tehran Stock Exchange that are selected through the systematic elimination method during the years 2008 to 2018. In order to test the hypotheses, panel data multiple regression model is applied. The results show that accrual components are less sensitive to sales decreases than to sales increases. Moreover, we can conclude that total accruals are more sensitive to sales decreases than to sales increases. After controlling for conditional conservatism, the results indicate that this sensitivity seems not to be affected by the conditional conservatism; and accruals and its components asymmetry are arising from the managers’ operating decisions.

One of the new issues in the field of conservatism is to examine the impact of bad news on conditional conservatism. Separating bad news indicators gives new insights on accruals and improves accrual models. The purpose of this study is to investigate the effect of separation of these indices on conditional conservatism in accrual-based models in comparison with the effect of general indices on these modelss. For this purpose, data of 144 companies were collected from Tehran Stock Exchange for a period of 11 years from 1385 to 1395. And relationships between research variables using panel data and The generalized least squares method is analyzed. In this study, the results of Alan et al. (2013), Ball and Shivakumar (2006) and Byzalov and Basu (2016) models were compared. The results of the comparison showed that separating bad news indices improves accrual-based models to predict the relationship of these indices with conditional conservatism. Also, other findings of this study based on the results of Basilo and Basu model showed that sales decrease, decrease in number of employees and cash flows this year have a direct and significant relationship with conditional conservatism, while decrease of cash flows of the previous year and the next year did not have a significant relationship with conditional conservatism.

Conditional conservatism is an integral part of the process of normal accruals that are not formulated in these models. This research aims, in accordance with Byzalov et al (2016), by controlling the asymmetric behavior of explanatory variables in accrual models, which is due to the observance of the principle of conditional conservatism by accountants, on the one hand, measure the change in the explanatory power of accrual models, on the other hand, examines the usefulness of the model developed by Byzalov and Basu (2016) in measuring conditional conservatism.

The model of Allen et al (2013) was the basis and were collected data from 150 companies listed in Tehran stock Exchange in the period 2006 to 2017, and bad news indicators were added to the original modelstep by step. 

Controlling current cash flow asymmetric effect to the initial accrual model in the first step and then taking into account the asymmetric cash flow effect of the before and the next year as well as the variable of sales growth and number of employees in the second stage and finally taking into account the cumulative effect of cash losses on selection as an indicator of bad news, they increased the explanatory power of the model step by step, and the Vuong test showed a significant increase.

The developed model of Byzalov and Basu (2016) has a higher explanatory power than the Alan et al. (2013) model and can be used to measure conditional conservatism in Iran.

The present study provides a new insight about accruals by controlling the asymmetric effects of disaggregated bad news indicators on accruals, which is consistent with conditional conservatism, and offers a new model for measuring conditional conservatism and earnings management tests in Iran.

One of risks that any investor encounters when entering the capital market, is stock price crash risk. In this paper, we investigate the relationship between stock price crash risk and structure of financial statements, using data from 115 firms in Tehran Stock Exchange at the period of 2001to 2017Solar Hijri, selecting 26 firms or 416annual observations from them and studying 75016 daily stock prices. The results show that, there is a significant relationship between stock price crash risk and the structure of financial statements. This means, the financial statements that prepared more conservatively, will have lower stock price crash risk. In addition, by dividing the stock price returns into two parts, the returns on the company's activity and second part, the returns due to the systematic market risk at95% confidence level, the present study showed that, the major part of the stock price returns during this period, arising from systematic risk changes (fluctuations in some factors like exchange rate and inflation). This is justified by the desire of managers to overcome the situation and financial statements in order to better reflect the circumstances of the company and not provide them conservatively.

An important factor approaches to conservative monetary policy. But conservative approach to reduce expectations of future performance of the business units as well. Monetary policy, using tools such as the rediscount rate, open market operations to control liquidity and statutory reserves apply. The purpose of this research is fundamental to reply to three questions first, what does that conditional conservatism is commercial credit companies? Second, firm size affect the relationship between conditional conservatism and commercial credit to companies? Third, monetary policy affect the relationship between conditional conservatism and commercial credit to companies? In this study, conditional conservatism as an independent variable, Company size and tighter monetary policy as an adjustment variable and commercial credit companies are as dependent variable. The study aims to achieve three main hypotheses based on the theoretical foundations Dai and Yong (2015) has been drafted and presented. The sample are 84 companies that have been selected by systematic elimination.The research in the period 2013-20181 using generalized least squares regression has been done. The results of the tests showed the hypothesis the first conditional conservatism and significant negative impact on the Company's business reputation. Second, the relationship between firm size and conditional conservatism is commercial credit companies and significant negative impact. And third that monetary policy has no effect on therelationship between conditional conservatism and not commercial credit companies.