Investigating the impact of the financial statement verification triangle on earnings response coefficient in the Tehran Stock Exchange

Document Type : Research Paper

Authors

1 Department of Accounting, Sanandaj Branch, Islamic Azad University, Sanandaj, Iran

2 Department of Economics, Sanandaj Branch, Islamic Azad University, Sanandaj, Iran

3 Department of Statistics, Sanandaj Branch, Islamic Azad University, Sanandaj, Iran

Abstract

Studying the triangle impact of financial statements (financial manager, CEO, and auditor) on earnings response coefficient (ERC), based on economic aspects of information, financial reporting, and accounting system play a vital role in the capital market. So, the present research is an applied, methodological and causal study that aims to investigate the effect of the triangle of financial statement approval on ERC in the Tehran Stock Exchange. The statistical population was composed of the companies listed on the Tehran Stock Exchange out of which 166 companies were selected by the systematic sampling method. The time frame is from 2016 to 2020. This study used a panel data model to investigate the relationship of the triangle sides with ERC and their relationship with ERC in poor accounting conditions. The results showed that any changes in each of the triable sides had a significant effect on ERC. The single, dual, and triple substitution in the confirmation triangle significantly reduced the year-end ERC, and compared to the three replacement sizes, the sum of ERC for dual substitution was greater than that for single and triple substitution. Also, variations in each of the triangle sides under poor accounting conditions had a significant effect on ERC. The single substitution in the confirmation triangle increased ERC, but the dual substitution reduced ERC significantly, but the impact of the triple substitution was not significant.

Keywords

[1] B. Abedini and A. Faridnia, Investigation of the impact of capital structure and corporate social responsibility report on asset returns and earnings response coefficient in companies listed in Tehran Stock Exchange, J. Econ. Stud. Financ. Manag. Account. 4 (2019), no. 2.
[2] H. Abrishami, The basics of econometrics; Volume II, University of Tehran Publications, Fourth Edition, 2006.
[3] R. Ball and P. Brown, An empirical evaluation of accounting income numbers, J. Account. Res. 9 (1968).
[4] R. Banaei, S.A. Waez and A.H. Montazer Hojat, The effect of profit sensitivity dimensions (profit reaction coefficient, abnormal return fluctuations and profit forecast error) on the remuneration of the board of directors, J. Financ. Res. 19 (2016), no. 4, 615–642.
[5] P.K. Chaney and D.C. Jeter, The effect of size on the magnitude of long-window earnings response coefficients, Contemp. Account. Res. 8 (2016), no. 2.
[6] D.W. Collins and S.P. Kothari, An analysis of intertemporal and cross-sectional determinants of earnings response coefficients, J. Account. Econ. 11 (1989), no. 2–3, 143–181.
[7] A. Derakhshan Mehr and S. Karami, The impact of CEO tenure and audit firm size on the quality of accounting information, J. Account. Manag. Persp. 2 (2019), no. 6.
[8] D. Dhaliwal and S. Reynolds, The effect of the default risk of debt on the earnings response coefficient, Account. Rev. 69 (1994).
[9] V. Hatamian, M. Babazadeh and N. Khatinejad, Investigating the effect of comparability of financial statements on accounting earnings response coefficient with emphasis on audit quality in companies listed in Tehran Stock Exchange, J. Account. Manag. Persp. 1 (2018), no. 4.
[10] A. Jahanshad and M. Navai Lavassani, The impact of auditor tenure and auditor type on conservative earnings reporting, Financ. Account. Audit. Res. 5 (2013), no. 18.
[11] S. Jamshidi Fard, Comparative study of financial statement responsibility, Account. Mag. 215 (2009).
[12] D.S. Jenkins and U. Velury, Does auditor tenure influence the reporting of conservative earnings? J. Account. Public Policy 27 (2008), no. 2, 115–132.
[13] Y.H. Kim, The relationship between default risk, size and financial performance from Korean firms, Korea Int. Account. Rev. 48 (2013).
[14] M. Lari Dasht Bayaz and J. Oradi, The relationship between tenure and CEO financial knowledge with audit fees, J. Account. Audit. Rev. 24 (2016), no. 1.
[15] D. Li, The certifying triangle of financial reports, LSU Doctoral Dissertations, Louisiana State University, 2016.
[16] S. Modaresi and M. Nazaripour, The effect of personality characteristics of financial and executive directors on the quality of financial reporting, Eur. Online J. Natural Soc. Sci. 2 (2013), no. 3(s).
[17] I. Pour Zarandi, M. Hassani and Z. Taheri, The relationship between earnings management and earnings response coefficient based on accounting variables to investigate eligible companies, J. Manag. Account. Audit. Knowledge 2 (2013), no. 5.
[18] A. Saghafi, Investigating and explaining the relationship between profit quality and market response, J. Account. Audit. Rev. 78 (2014).
[19] T.E. Vermeer, Do CEO/CFO certifications provide a signal of credible financial reporting? Res. Account. Regul. 18 (2005), 163–175.
[20] D. Yermack, Higher market valuation of companies with a small board of directors, J. Financ. Econ. 40 (1996), no. 2, 185–211.
Volume 14, Issue 6
June 2023
Pages 119-129
  • Receive Date: 04 June 2022
  • Revise Date: 09 September 2022
  • Accept Date: 12 September 2022