the conservatism in accounting and its effect on earnings response coefficient in tehran stock...

International Journal of Scientific Research in Knowledge, 2(1), pp. 28-37, 2014

Available online at http://www.ijsrpub.com/ijsrk

ISSN: 2322-4541; ©2014 IJSRPUB

http://dx.doi.org/10.12983/ijsrk-2014-p0028-0037

82

Full Length Research Paper

The Conservatism in Accounting and Its Effect on Earnings Response Coefficient in

Tehran Stock Exchange Listed Companies

Abbas Ramezanzadeh Zeidi1*

, Zabihollah Taheri2, Ommolbanin Gholami Farahabadi

3

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

2Department of Accounting, Payamenour University, Sari, Iran

3Department of Accounting, Payamenour University, Neka, Iran

*Corresponding Author: E-mail: [email protected]

Received 11 November 2013; Accepted 27 December 2013

Abstract. The main purpose of this research is to investigate the relationship between conservatism and earnings response

coefficient. For conservatism the book-to-market ratio and for measurement of earnings management Ohlson's valuation model

is used. The statistic population of the research includesthe listed companies in Tehran Stock Exchange and the samples

include 154 companies over the period of 2007 to 2012. Using the panel regression analysis, several models have been

estimated and the hypotheses have been examined. Results show that there is negative and significant relationship between

conservatism and earnings response coefficient.

Keywords: Conservatism, Earnings Response Coefficient, Earnings per Share

1. INTRODUCTION

Conservatism has been a controversial concept since

accounting started as a science, and it has a significant

role in the practice of accounting. Basu believes that

conservatism has affected both theoretical and applied

accountings for centuries. Historical records of the

early 15th century concerning partnership and

collaborative trade trades show that accounting has

been conservative in Medieval Europe. Conservatism

is one of the dominant features of financial reports

which have attracted more attention due to scandals

(in companies like Enron and WorldCom). Some

recent studies, such as Watts (2003), Roychowdhury

and Watts (2005), Lafond and Watts (2006), are

specifically focused on conservatism. The notion of

conservatism was introduced when the balance sheet

was the most important, if not the only, financial

report, and the components of earnings and other

operational results were less often presented out of the

companies.

In securities market, investment decisions are

affected by factors like news media, analysts, and

financial reports of companies. Therefore, different

responses of investors towards earnings information

lead to different responses by the market. But what are

the reasons behind the different responses of the

market? Scott, in his book titled financial accounting

theory, presents several reasons including systematic

risk (beta), quality of earnings, continuation of

profitability or loss, opportunities for investment

growth, and capital structure. Thus, in earnings

response coefficient two variables must be

determined; abnormal returns and unexpected

earnings. New securities market values that react to

new information can be observed. In fact, the response

of the securities market for a number of unexpected

earnings is higher for some companies. Earnings

response coefficient is different responses of the

market to the earnings information. In other words,

earnings response coefficient measures the

unexpected output in response to the unexpected

earnings reported by the companies which publish the

securities (Khoshtinat et al., 2008).

One of the factors that may lead to a different

response of the market to earnings information is

conservatism. Many researches have been done on the

responses of the market to earnings information.

Based on such researches, since the notions of

conservatism and earnings response coefficient are

applied in accounting differently for financial

reporting, and each one can affect the quality of

financial reporting, and hence affect the efficiency of

investment market and the behavior of investors,

creditors, and in general behavior of all who use the

financial lists, it seems that investigating the relation

Zeidi et al.

The Conservatism in Accounting and Its Effect on Earnings Response Coefficient in Tehran Stock Exchange Listed

Companies

82

between these two factors can contribute to the

literature of this issue.

In this study, the researcher tries to answer the

question of whether conservatism in accounting

approaches affects the earnings response coefficient,

and what is the response of earnings coefficient of

each share in such companies.

2. BACKGROUND AND LITRATURE REVIEW

Many researches have been done concerning the

earnings response coefficient and the factors affecting

it. According to these studies, the investors’ decisions

lead to the market response. The new values of the

securities market which respond to the new

information can be observed. The first evidences of

the securities market response to publishing and

announcement of earnings were provided by Ball and

Brown (1986). In addition to demonstrating the

market response to publishing the earnings according

to the prediction, they measured the amount of the

response in forms of mean and average. They showed

that investors’ response to the companies with good

news resulted in unexpectedly positive outcome and

to the companies with bad news led to unexpectedly

negative outcome. Ball and Brown applied the

average of unexpected securities in their research.

This average can cover a high amount of deviation

from the mean. Thus, the unexpected outcome is

probably at the average level for some companies and

below the average for some others.

Vikil (1990) investigated the effect of audit change

on the earnings quality and the earnings response

coefficient. He hypothesized that earnings response

coefficient in the companies that had changed their

audit would face a significant change; however, he

could not prove his hypothesis based on the statistic

results.

In a research trying to provide a way to interpret

the market from the published and announced

information of earnings, Ceris and Samer (2005),

directly related earnings response coefficient with

continuation of profitability trend. This research

differs from other researches concerning the effect of

continuation of profitability trend on the earnings

response coefficient in that it considered the

continuation of unexpected earnings trend as the

effective variable rather than the continuation of

profitability trend. Moreover, in interpretation of the

earnings response coefficient, rather than dividing it

into two levels, stable and instable, it is divided into

several new levels. The findings proved the relation

between the variables of the research.

Tosh, Zayang and Jian (2005), tried to show that

the companies which disclose the increases due to

keeping in profits and incomes have a more earnings

quality and higher earnings response coefficient in

comparison with those companies that disclose only

increases due to keeping in profit. Their research

findings proved their assumptions.

In a research, Louis (2011) investigated the

relation between conservatism accounting and the

value of kept cash money with that of abnormal

outcome of a company. He found that conservatism

accounting affects positively the relation between kept

cash money and future operation of the company. In

addition, the results prove that conservatism

accounting is related to optimal use of available cash

of the company. The results also supported the view

that conservatism accounting can be are placement for

foreign supervision, resulting in expense decrease.

Abed et al. (2012) investigated a level of

conservatism in accounting and its relation with

earning management. The results of their research

showed that levels of conservatism differ in different

companies. They also found that conservatism and

earnings managements are negatively correlated.

Khoshtinat and Joshghani (2006) examined the

effects of financial leverage on earnings response

coefficient in Tehran Stock Exchange listed

companies. The objective of their research was to

answer the question of whether investors and analysts

consider the capital structure of the companies and

how much leverage they were in their response to

good and bad news resulting from publishing

accounting information, and whether their response

affected such news. In this research, they employed

the balance sheet approach to measure financial

leverage. In the balance sheet approach two

definitions are given for leverage: the ratio of debt to

assets and the ratio of debts to the share holders’ right,

both of which have been considered in this research.

Investigation of the only hypothesis by regression

analysis during the period of 2000-2004 shows that in

the first definition of leverage in the entire sample and

in the second definition of leverage in the high level

of leverage, there are negative relations between the

financial leverage and the earnings response

coefficient. However, in the first definition of

Leverage in the low level and in the second definition

in the entire sample in the low level no significant

relation was observed between the financial leverage

and the earnings response coefficient.

Ahmadi (2008) studied the relation between the

earnings quality and earnings response coefficient. In

this study the qualitative characteristics of financial

information are used to evaluate the earnings quality.

In this research, firstly, the dimensions of relevance

and reliability benefits have been separately estimated

using time series analysis and combined data methods.

Companies were classified on the basis of high and

low earnings quality based on cluster analysis. In


03

order to test the hypothesis Ohlson’s model

(regression price-profit) was used. The findings show

that the earnings response coefficient as well as the

explanatory power of the regression (cost-benefit) is

significantly higher in portfolio of companies with

high quality of earnings than companies with low

quality of earnings. Thus, both hypothesis of the

research were proved.

2.1. The Statistic Population

In the present study, to test the hypotheses classified

financial data of listed companies in Tehran Stock

Exchange has been used. Samples were limited to the

companies with the following specifications:

1) The end of the financial year of the company was

the end of Iranian calendar year.

2) The company did not have a change of the financial

year in two succeeding years.

3) The financial data of the company for the study

period was accessible.

4) The company was not one of the investment

companies, leasing and banks due to the nature of

their activities.

Considering the mentioned limitations, 154 companies

were selected for the study.

2.2. The Research Hypothesis

Based on the preliminary studies, the research

hypothesis is as follows:

There is a significant correlation between

conservatism and earnings response coefficient.

3. METHODOLOGY

This research is based on descriptive-exploratory

approach. It studies the present situation, describing it

systematically, and examines characteristics and

features of the present situation in relations between

the variables. This type of research is not only

practical in the area of decision-making and planning

but is also fundamental since it leads to scientific facts

based on inductive method.

3.1. The Operational Definition of Variables and

the Way They are calculated

Dependent Variable (Earnings Response Coefficient),

The earnings response coefficient measures the

unexpected yield of the market in response to the

unexpected component of reported earnings by a

company that has securities sites. In other words, the

earnings response coefficient measures the sensitivity

of the market to declaration of profit by the slope

coefficient of the regression of abnormal returns and

unexpected earnings (Scott, 2003). In this research,

the dependent variable is the earnings response

coefficient. The earnings response coefficient, which

measures the reaction of the market to changes of

profit of each share and is derived from a regression

of price and earnings per share, accounts for the way

the information regarding profit can affect the stock

price. The assessment model, based on Ohlson’s , is as

follows. Following Barth et al. (1999), the researcher

added two variables, namely risk and growth, to the

equation so that the effects of other variables can be

controlled. The desired variable in this research is the

EPS coefficient.

Price = δ0 +δ1 BVE + δ2 EPS + δ3 (EPS * DE) + δ4

(EPS *EVAR) + ψ

Price: The price of each share at the end of the

financial year

BVE: Book Value of each share

EPS: Earnings per share before unexpected items

DE: Debt to equity ratio (risk)

EVAR: The change percentage in earnings of per

share

3.2. The Independent Variable

Conservatism is one of the dominant features of

financial reporting which have attracted more

attention in recent years due to financial scandals (in

companies like Enron and WorldCom). The

independent variable in this research is conservatism.

According to previous studies (Ahmad et al, 2002;

Zhang, 2007; Lobo et al, 2008), the ratio of the book

value to the market value of equity is considered as

the representative of conservatism. The ratio of book

value to market value of equity being less than one is

an indication of accounting conservatism.

3.3. The Control Variables

3.3.1. Size

Zimmerman (1983) states that big companies are

more conservative due to more political sensitivity

(Political Cost Theory). In the present research, the

natural logarithm of total assets of the end of period is

considered as the indication of the company size.

3.3.2. Operation

Operation, measured through ROE, is calculated by

dividing the earnings, after tax deduction, on the total

shareholders’ equity at the end of the period.

3.3.3. Financial Leverage

Accounting methods are related to financial leverage

Zeidi et al.


Companies

03

since one of the criteria which is considered by the

creditors in Iran, i.e. banks, is the ration of debts of

the company. Therefore, the higher the ratio of debt of

a company is, the less intention it will show to use

conservatism methods. Consequently, company

managers are expected to apply less conservative

methods in their financial statements in order to

reduce the risk of rejection of loan applications and to

avoid incurring higher interest costs. This variable is

defined as total debts to total assets at the end of

period. This ratio is calculated by dividing total debts

to total assets.

3.4. Earnings Management

According to previous studies, discretionary accruals

in a company represent earnings management.

Residual values of the modified Jones’s model of

accruals, that is, discretionary accruals are employed

in this research as the criterion of earnings

management.

3.5. Analyses Concerning the Main Model of the

Research

The hypothesis of this research concerns the relation

between conservatism and earning response

coefficient. This relation is also considered in the

main model of the research. To examine such a

relation, in this research, Ohlson’s general model of

assessment was employed. To examine the main

model of the research, the interactive variable of

conservatism index (the ratio of book value to market

value) and earnings per share is included in the main

model. In this research, to control the effects of some

factors according to previous studies, the researcher

will consider the variables of the ratio of debt to

shareholders’ equity and percentage of change in

earnings per share, size, yield of shareholders’ equity,

earnings management as control variables, the impact

of which will be assessed as interactive relationships.

3.6. Descriptive Statistics of the Main Model

Variables

The descriptive statistics of the variables include

central, dispersion, and distribution indexes. In this

research, information related to mean and median

from central index, standard deviation related to

dispersion index, and stretching and skewing related

to distribution index are presented. In addition, in this

figure, Jarque -Bera statistic and the related level of

significance are presented for examining the normality

of the variables distribution. The descriptive

statistics of the main model variables are given in

table (1):

Table 1: Descriptive Statistics of the Main Model Variables

EM ROE SIZE EVAR DE CONS EPS BV P

-4.50E-12 0.405161 13.38333 11.26447 2.063388 0.880815 639.5525 1885.271 4394.933 Mean

0.003025 0.261357 13.17000 -7.996947 1.730000 0.550846 468.5200 1304.230 2458.000 Median

2.004014 83.21339 19.62000 12526.78 303.3700 131.8100 13448.11 211071.0 58414.00 Maximum

-4.414097 -55.91304 9.820000 -34126.57 -201.1100 -30.02000 -3891.480 -21855.54 150.0000 Minimum

0.233599 5.445384 1.483872 1524.559 15.02313 4.854001 1170.477 7914.886 5685.128 Standard

Deviation

-6.818365 4.407300 0.808653 -11.82005 3.696714 22.24455 3.038666 22.18468 4.270578 skewing

154.5776 131.4621 4.018428 296.2156 245.1163 591.4461 27.01835 556.7610 30.60352 stretching

857948.6 624521.4 137.1351 3291906. 2236983. 13218915 23555.15 11688980 31761.20 Jarkko-

Bra

0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 probabilit

y

Observations show that the average price of each

share of the sample companies is about 4395 Rials.

The book value per share is about 1885 Rials in

average, and the earnings per share is average about

600 Rials. These three are the basic variables of

Ohlson’s assessment model which all have positive

skewing and stretching. Positive stretching indicates

that the curve of variables distribution is longer than

normal distribution. As it is also observed from the

Jarque-Bera and the related level of significance, the

three variables do not have a normal distribution.

Observations indicate that the conservatism index

of the sample companies is about 0.88 in average. As

it was already mentioned, in Jain and Rezaee’s (2004)

belief, the ratio of book value to market value of

equity being less than one is an indication of

accounting conservatism. Since this proportion is less

than one in the sample companies, in these companies

there is conservatism accounting. In half of the

companies the ratio of book value to the market value

is more than 0.55, and in the other half this ratio is

less than 0.55. The debt of the sample companies is

averagely about two times of their shareholders’

equity. The mean of change percentage of earnings

per share shows that the earnings per share of the

companies have changed nearly 11.26 units during the


08

period of this research. The yield of shareholders’

equity of the research samples is about 40 percent.

The discretionary accruals, which indicate earnings

management, is -4.50E-12. The minus mark shows a

negative relation between earnings management and

earnings response coefficient.

4. RESULTS AND DISCUSSIONS

4.1. Examining Correlation between the Main

Model Variables

In this section, using Pearson's correlation coefficient,

existence and direction of correlation between the

variables of the model of response coefficient is

examined. The correlation coefficient matrix is given

in table (2).

Table 2: Correlation coefficients between the variables of the main model

Price Book Value

Earnings

per Share

Conservatis

m

Ratio of

Debt Growth Size

Yield of

Shareholder

s’ Equity

Earnings

Management

Price 1.000000

-----

Book Value 0.022718 1.000000

0.5157 -----

Earnings per

Share

0.683421 0.005685 1.000000

0.0000 0.8708 -----

Conservatism -0.066695 0.293781 -0.046933 1.000000

0.0561 0.0000 0.1791 -----

Ratio of Debt -0.007256 -0.003611 0.015985 -0.004290 1.000000

0.8355 0.9177 0.6474 0.9023 -----

Growth -0.168266 0.013576 -0.113545 0.025005 0.029123 1.000000

0.0000 0.6977 0.0011 0.4743 0.4046 -----

Size 0.001632 -0.001908 -0.019292 0.003455 -0.020919 -0.008114 1.000000

0.9627 0.9565 0.5810 0.9213 0.5495 0.8164 -----

Yield of

Shareholders’

Equity

0.053068 0.002673 0.032689 -0.008871 -0.021218 -0.002386 -0.040396 1.000000

0.1287 0.9390 0.3496 0.7997 0.5438 0.9456 0.2476 -----

Earnings

Management

0.052717 -0.021509 0.317746 -0.028300 0.019435 -0.029490 -0.007237 0.009058 1.000000

0.1312 0.5383 0.0000 0.4180 0.5782 0.3987 0.8360 0.7955 -----

As it is seen in this table, considering the level of

significance related to correlation coefficient between

the variables, the intensity of the relationship between

the explanatory variables of the main model is weak

or average, and a strong correlation between the

explanatory variables is not observed. Therefore,

simultaneous entry of variables in the research model

would not interfere in terms of linear time.

4.2. Tests Related to Main Models of the Research

Test of the main model is performed at 95% certainty

level based on multiple variables regression, and in

estimating the general model combined data analysis

will be used. In this analysis, first to choose a suitable

model, Chow test (for choosing a model with or

without effects) and Hausman test (for choosing a

model with fixed effects) are used. For examining

significance of the regression model Fisher’s statistic,

for examining the significance of the regression model

coefficients Student’st statistic, for examining

autocorrelation between observations Durbin-Watson

statistic, and for examining explanatory power of the

model the adjusted coefficient of determination

statistics are used.

4.3. Tests Related to the Model of Correlation

between Conservatism Index and Earnings

Response Coefficient

To choose a suitable model, Chow test and Hausman

test were used. The results of these tests are given in

table (3). Considering the F statistic of Chow test and

the amount of probability (less than 0.05) the model

with effects is suitable. According to the 2

of

Hausman test and the amount of probability (less than

0.05), the model with fixed effects is suitable.

Zeidi et al.


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00

Table 3: The Results of Choosing a Model for Model Test of Relation between Earnings Management and Earnings Response

Coefficient

Test Type Test Statistic Amount of

Statistic

Freedom

Degree

Probability

Chow Test F 5.161335 (153.748) 0.0000

Hausman

Test

2 226.473606 3 0.0000

Table 4: Estimating the model of relation between conservatism index and earnings response coefficient

Dependent Variable: P

Explanatory Variables Coefficients Standard Error Statistict Probability

C 3591.950 59.15273 60.72331 0.0000

Book Value 0.088617 0.031100 2.849427 0.0045

Earnings per Share 1.298114 0.087276 14.87372 0.0000

Interactive relationship between

conservatism and earnings per share

-0.109625 0.042242 -2.595162 0.0096

adjusted coefficient of determination

statistic

0.809490 Fisher’s statistic 25.62276

Durbin-Watson’s Statistic 1.872307 Probability of Fisher’s Statistic 0.000000

P = 3591.950 + 0.088617*BV + 1.298114*EPS - 0.109625*CONS*EPS + [CX=F]

The results of estimating the model by fixed effects

method are given in table (4). Analyzing the results of

model estimating, the followings can be concluded:

the t statistic and probability (less than 0.05) indicate

the significance of both book value per share and

earnings per share. Moreover, the width of source of

the model affects the model positively and

significantly. Considering the fact that the variable

coefficient of earnings per share in the model is

1.298114, the market price of each share responds

positively and significantly to the changes of earnings

per share. In other words, the earnings response

coefficient is positive.

In this model, correlation between conservatism

and earnings response coefficients is performed

through examining the interactive variable. The t

statistic and the probability (less than 0.05) indicate

the significance of the interactive variable. Of course,

the negative coefficient of the interactive variable

indicates a negative and significant correlation

between the index of conservatism and earnings

response coefficients.

In the first model of earnings response coefficient,

the variable coefficient of earnings per share in the

model is 2.002890. In other words, earnings response

coefficient is positive, and the market price of each

share responds positively and significantly to changes

of earnings per share. In the model of correlation

between conservatism index and earnings response

coefficient, the variable coefficient of earnings per

share in the model is 1.298114. In other words,

earnings response coefficient is positive and the

market price of each share responds positively and

significantly to changes of earnings per share.

Decrease in coefficient of earnings per share

represents the impact of conservatism interactive

variable on earnings response coefficient, a fact which

is in accordance with the research findings. The

adjusted R2 statistic of the model indicates that nearly

80 percent of changes in the market price of each

share can be explained by the explanatory variables,

while the adjusted R2 statistic of the first model,

without the presence of the interactive variable of

earnings management is about 37 percent. This

increase of approximately 43 percent in adjusted

coefficient of determination is another reason for the

interactive role of conservatism in the model, and it

can account for high reaction of the market price of

each share to the changes of earnings per share.

Durbin-Watson statistic of the model is 1.872307, and

this rejects the assumption of autocorrelation between

the elements of the model.



Response Coefficient at the Presence of Control

Variables (Ration of Debt and Growth)

To choose a suitable model, Chow test and Hausman

test were used. The results of these tests are given in

table (5). Considering the F statistic of Chow test and

the amount of probability (less than 0.05) the model


03

with effects is suitable. According to the X2

of

Hausman test and the amount of probability (less than

0.05), the model with fixed effects is suitable.

The results of estimating the model by fixed effects

method are given in table (6).

Table 5: The Results of Choosing a Model for Model Test of Correlation between Earnings Management and Earnings

Response Coefficient at the Presence of the Control Variables

Test Type Test Statistic Amount of

Statistic

Freedom

Degree

Probability

Chow Test F 7.317205 (153.731) 0.0000

Hausman

Test

2 246.543710 5 0.0000

Table 6: Estimating the model of correlation between conservatism index and earnings response coefficient at the presence of

the control variables of leverage and growth



C 3671.761 52.32307 70.17480 0.0000

Book Value 0.022108 0.009979 2.215518 0.0270


Interactive correlation between


-0.094261 0.034362 -2.743143 0.0062

Interactive correlation between ratio of

debt and earnings per share

0.012191 0.003992 3.053633 0.0023

Interactive correlation between growth

and earnings per share

-0.000128 1.14E-05 -11.20461 0.0000


statistic



P = 3671.761 + 0.022108*BV + 1.081997*EPS - 0.094261*CONS*EPS

+ 0.012191*DE*EPS - 0.000128*EVAR*EPS + [CX=F]

Analyzing the results of model estimating, the

followings can be concluded: the t statistic and the

probability (less than 0.05) indicate the significance of

both book value per share and earnings per share.

Considering the fact that the variable coefficient of

earnings per share in the model is 1.081997, the


significantly to the changes of earnings per share. In

other words, the earnings response coefficient is

positive.

The variable coefficient of earnings per share in

this model decreased in comparison with the previous

models. This means that earnings response coefficient

in the model with the interactive role of conservatism

and with the control variables is decreased compared

with the previous situation in which the control

variable were not present, indicating that the control

variables affects the model. The adjusted R2 statistic

of the model indicates that nearly 83 percent of

changes in the market price of each share can be

explained by the explanatory variables. The adjusted

coefficient of the model with interactive role of

conservatism is higher than the previous models.






Response Coefficient at the Presence of Control

Variables (Ration of Debt, Percentage of Earnings

Changes, Size, Profitability, and Earnings

Management)

Analyzing the results of model estimating, the

followings can be concluded: the t statistic and the

probability (less than 0.05) indicate the significance of

both book value per share and earnings per share.

Considering the fact that the variable coefficient of

earnings per share in the model is 1.196885, the


significantly to the changes of earnings per share. In

other words, the earnings response coefficient is

positive.

The variable coefficient of earnings per share in

this model has increased in comparison with the

previous models. This means that earnings response

coefficient in the model with the interactive role of

conservatism and with the control variables (yield and

earnings management) is again increased compared

with the previous situation, showing the role of the

newly added control variables. Among the newly

added control variables, the size is not significant, the

control variable of yield has a positive and significant

Zeidi et al.


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03

effect on the model, and the earnings management has

a negative and significant effect. The adjusted R2

statistic of the model indicates that nearly 89 percent

of changes in the market price of each share can be

explained by the explanatory variables. The adjusted

coefficient of the model with interactive role of

conservatism is higher than the previous models.




Table 7: Estimating the model of correlation between conservatism index and earnings response coefficient at the presence of

control variables



C 3498.928 39.85992 87.78062 0.0000

Book Value 0.086725 0.036095 2.402697 0.0166


Interactive correlation between


-0.124159 0.049813 -2.492503 0.0129

Interactive correlation between ratio of

debt and earnings per share

0.021150 0.005418 3.903452 0.0001

Interactive correlation between growth


-0.000131 8.93E-06 -14.66161 0.0000

Interactive correlation between size and

earnings per share

0.010274 0.020782 0.494354 0.6212

Interactive correlation between yield


0.042912 0.019164 2.239226 0.0255

Interactive correlation between earnings

management and earnings per share

-0.620493 0.083784 -7.405852 0.0000


statistic



P = 3498.928 + 0.086725*BV + 1.196885*EPS - 0.124159*CONS*EPS

+ 0.021150*DE*EPS - 0.000131*EVAR*EPS + 0.010274*SIZE*EPS

+ 0.042912*ROE*EPS - 0.620493*EM*EPS + [CX=F]

5. CONCLUSION

In this research, first the interactive variable of

conservatism was fitted without control variables. The

results show that the earnings response coefficient is

positive and its amount is less than the primary

situation without the interactive variable of earnings

management, indicating that the interactive variable of

conservatism affects the model. In the second stage,

the interactive variables of risk and growth in form of

interaction were inserted into the model together with

the interactive variable of conservatism. In this case,

the findings showed a positive earnings response

coefficient, yet the amount was less than the first case

in which no control variable was present. This

indicates that the control variables of risk and growth

influence the amount of earnings response coefficient.

In the last stage, the interactive variables of size, yield

of shareholders’ equity, and earnings management

were inserted into the model. The findings in this

case, too, show a positive earnings response

coefficient. This time, also, the earnings response

coefficient was higher in comparison with the

previous situation in which only two variables of

growth and risk were present, indicating the effect of

new control variables on the changes of earnings

response coefficient. In general, it can be concluded

that there is a negative and significant correlation

between conservatism and earnings response

coefficient, and adding the interactive variable of

conservatism will lead to reduction of earnings

response coefficient in the model.

Suggestions for Future Studies:

1- It is suggested that the role of earnings smoothing

on statement of earnings response coefficients are

examined.

2- It is suggested that time-series properties of

earnings, including earnings persistence, earnings

predictability and the like should be considered in the

evaluation of earnings response coefficients.

3- It is suggested that earnings response coefficient is

separately investigated in different bourse industries.

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Companies

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Abbas Ramezanzadeh Zeidi received his MA in Accounting from Tehran Branch, Islamic Azad

University. Currently, he is PhD Candidate at AMU India. He has more than 20 papers in the referees

journals and conferences. He is faculty member of Neka Branch, Islamic Azad University.

Zabihollah Taheri received his MA in Accounting from Tehran Branch, Islamic Azad University. He is

faculty member of Payamenour University, Sari, Iran.

Ommolbanin Gholami Farahabadi received her MA in Accounting from Payamenour University,

Behshahr, Iran. She is faculty member of Payamenour University, Neka, Iran.

the conservatism in accounting and its effect on earnings response coefficient in tehran stock...

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