Empirical Studies in Financial Accounting

Abstract Abstract

This study examines the effect of classification shifting–based earnings management on the risk of stock price crash. Classification shifting increases operating profit by reallocating operating expenses to non-operating items without altering net income, making it a low-cost tool for concealing negative performance news and thereby increasing crash risk. The sample consists of 129 listed companies over the period 2012–2023 (with additional data from 2007 for classification-shifting calculations). Crash risk is measured using negative return skewness and down-to-up volatility. The findings show that classification shifting has a significant negative relationship with crash risk in both measures, indicating a higher probability of crash when such shifting is used more extensively. Moreover, a larger gap between operating profit and net income weakens this negative relationship. Cash flow volatility and information asymmetry exhibit a positive effect on crash risk only under the negative skewness measure and weaken the main relationship, whereas financial leverage shows no significant effect.

Keywords: Reclassification-based earnings management, stock price crash risk, information asymmetry, cash flow volatility.



Introduction

Earnings management is used by managers to influence financial reports, creating a favorable short-term image but increasing long-term stock price crash risk. A less examined method is classification shifting, where operating expenses are moved to non-operating items to inflate operating income without affecting net income, making it difficult for investors to detect. First highlighted by McVay (2006), this method is influential because investors generally rely more on operating income than on net income.

Research shows that overstated operating earnings mislead investors and can raise crash risk. In Iran, although classification shifting has been introduced in prior studies, its effect on stock price crash risk has received limited attention. Weak auditor oversight, low implementation cost, and the lack of clear classification standards allow firms to improve the appearance of financial performance by reallocating income-statement items.This study investigates how classification shifting affects stock price crash risk among firms listed on the Tehran Stock Exchange and examines moderating factors such as information asymmetry, cash flow volatility, and capital structure. It presents the theoretical background, research models, and empirical results.



Methods & Material

The present study examines the relationship between earnings management through classification shifting and stock price crash risk, with the moderating role of information asymmetry, cash flow volatility, and capital structure. Accordingly, this research is descriptive–correlational in nature. In terms of purpose, it is an applied study. The required data include items from financial statements and the accompanying notes available in the “Rahavard Novin” comprehensive database and the comprehensive corporate information database on the official website of the Tehran Stock Exchange, which were extracted as needed. The collected data were organized using Excel in the form of data files, after which the relevant variables were calculated and ultimately analyzed using EViews software.

The statistical population of the study consists of all companies listed on the Tehran Stock Exchange during the years 2012 to 2023and the research sample includes 129 companies.



Findings

The results showed that classification shifting has a negative and significant relationship with stock price crash risk, meaning that greater use of this method increases the likelihood of a crash. Moreover, an increase in the gap between operating income and net income weakens the strength of this relationship. Cash flow volatility and information asymmetry have a positive effect on crash risk only when using the negative skewness measure, thereby weakening the main relationship, whereas capital structure (financial leverage) had no significant role.



Conclusion & Results

This study investigates the relationship between earnings management through classification shifting and stock price crash risk in the Iranian capital market, considering the moderating roles of cash flow volatility, capital structure, and information asymmetry. The results indicate that, unlike international studies, classification shifting in Iran has a negative and significant effect on crash risk, as managers primarily use it to smooth earnings and present a stable performance, rather than to hide bad news. The gap between operating and net income weakens this negative effect, as lower earnings quality reduces the credibility of reclassification signals. Cash flow volatility increases uncertainty and weakens the stabilizing effect of classification shifting, raising crash risk, whereas financial leverage shows no significant impact. Information asymmetry has a direct positive effect on crash risk but does not significantly moderate the relationship between classification shifting and crash risk. Overall, in the Iranian market, classification shifting functions as a stabilizing tool, smoothing earnings, reducing informational uncertainty, and lowering stock price crash risk, while cash flow volatility and low earnings quality can weaken its effectiveness.

Abstract Block trades, by transferring a significant volume of shares and revealing company-specific information, can influence the price discovery process and market efficiency, thereby affecting the level of information asymmetry among market participants. Accordingly, the aim of the present study is to examine the impact of block trades on information asymmetry, with an emphasis on the moderating role of media coverage. The statistical population of this study consists of companies listed on the Tehran Stock Exchange during the period 2014 to 2024. Using a systematic exclusion method, data related to 100 companies and a total of 19,227 block trades were selected and analyzed. The generalized method of moments (GMM) was employed to test the research hypotheses. The empirical findings indicate that both the number of block trades and the ratio of block trade volume have a positive and significant impact on information asymmetry. Furthermore, the results of the second part of the study reveal that media coverage negatively moderates the relationship between block trades and information asymmetry. In other words, in companies with broader media coverage, the effect of increasing block trading on information asymmetry is weakened. Overall, the inefficient structure of the Iranian capital market, the high concentration of ownership, and the low level of information transparency have caused block trading, by itself, to fail to effectively disseminate company information and reduce information asymmetry. Nevertheless, expanding media coverage and providing timely information about significant company events—including block trades—can enhance market transparency, promote more accurate reflection of firm-specific information in stock prices, and consequently reduce information asymmetry. Introduction Block trading, as one of the significant events in capital markets, has always attracted the attention of financial analysts due to the large volume of shares transferred and its potential to influence prices and liquidity. These transactions can have consequences for market efficiency and information transparency by transferring information and altering the ownership structure of companies. On the other hand, media coverage plays a moderating role in this process by reducing information asymmetry and increasing investor awareness. Accordingly, the present study examines the effect of block trading on information asymmetry, emphasizing the moderating role of media coverage in the Tehran Stock Exchange. The main objective of this research is to analyze the effect of block trading on information asymmetry as one of the outcomes of such transactions and to identify the role of media coverage as a moderating factor. By providing a deeper understanding of how block trading affects the market, this research can assist investors and financial analysts in making more informed decisions. Furthermore, by examining the role of media coverage, it seeks to identify and analyze how public information influences market behavior and investor reactions to block trades. From a theoretical perspective, this study can contribute to the development of existing theories in finance and investor behavior, creating new frameworks for analyzing financial markets. In other words, this research can help establish a new discourse on the relationship between media, large transactions, and market behavior, paving the way for future studies in this field. Methodology In terms of purpose, the present study falls under applied research, as its results can serve as a basis for decision-making by managers, policymakers, and capital market investors. Regarding data type and execution process, this research adopts a quantitative approach and is ex-post-facto in nature. The research data include information from all companies listed on the Tehran Stock Exchange between 2014 and 2024 that conducted at least one block trade. After applying systematic elimination, 100 companies with a total of 19,227 block trades were selected as the final sample. Data analysis was performed using descriptive and inferential statistics and the Generalized Method of Moments (GMM). The tools used include Raah-Avard Novin and Excel for extracting and calculating variables, and Stata for hypothesis testing and result analysis. The validity of the GMM method was examined using Arellano & Bond (1991) tests, including the Sargan test for instruments and the m2 test for second-order serial correlation. Findings This research investigated the effect of block trading on information asymmetry in the Tehran Stock Exchange, considering the moderating role of media coverage. The main findings indicate that the number of block trades and the ratio of block trading volume have a positive and significant impact on information asymmetry. In other words, block trading is associated with increased information asymmetry. Additionally, media coverage negatively moderates the relationship between block trading and information asymmetry; that is, the positive effect of block trading on information asymmetry is weakened in companies with more extensive media coverage. This means that active news coverage, by reducing information asymmetry, diminishes the positive impact of block trading on information asymmetry. This result is attributed to the inefficient structure of Iran's capital market and the need for media coverage to enhance transparency and better reflect company-specific information in stock prices. Conclusion Regarding the level of block trading in Iran and its trends, it can generally be stated that Iran's stock market, unlike other countries, faces challenges due to issues such as inefficiency, high ownership concentration, and lack of transparency in information dissemination. The untimely announcement of positive and negative news and investors' lack of trust in available information prevent the informational content of block trades from being adequately reflected in stock prices. This situation increases access to private information for informed investors, thereby intensifying information asymmetry between informed and uninformed investors. Furthermore, the synergy between normal and block markets helps reduce liquidity shocks and the risk of these stocks. Companies with active block markets have higher liquidity, and their trading volume is greater compared to the normal market. Improved liquidity following block trades contributes to increased market efficiency. In the second part of the research, the conclusion indicates that media coverage has a positive effect on the relationship between block trading and information asymmetry. Companies that have active media coverage and promptly disclose information and objectives of block trades are able to attract new buyers, thereby reducing information asymmetry. The final conclusion is based on the principle that information transparency mechanisms, such as media coverage, play a vital role in optimizing the benefits of block trading for Iran's capital market.    

Abstract Information asymmetry and economic uncertainty are features of the capital market in today's complex business environment, which increase audit risk and litigation risk, and can be effective in explaining audit fees. The purpose of this research is to investigate the role of legal claims risk, information asymmetry and economic uncertainty in explaining audit fees. The time domain of the research is the period from 2013 to 2021 and the research sample includes 120 companies listed on the Tehran Stock Exchange. Research findings, based on analysis using multivariable regression models on combined data, show that among the macroeconomic variables investigated (including economic growth rate, inflation rate, exchange rate, and interest rate), both economic growth rate and inflation rate have a direct and significant relationship with the audit fee. Additionally, there is a direct and significant relationship between the risk of lawsuits and information asymmetry with the audit fee. The results indicate that the risk of lawsuits, economic uncertainty and information asymmetry play an effective role in explaining auditors' fees.
 

Introduction

Audit fees indicate the amount of auditors' effort to reduce the audit risk to the reasonable level. It is a measure to control financial risk and some legal claims that are threatening audit firms. According to litigation risk, auditors try to control this risk by increasing their efforts and audit fees. Chen (2019) and Frino et al. (2022) state that information asymmetry and economic uncertainty increase audit risk and litigation risk, and can influence audit fees. In other words, audit services are necessitated by the conflict between shareholders and managers. Information asymmetry and economic uncertainty increase agency costs, thereby heightening the necessity for auditing to control and manage these costs. Consequently, auditors increase audit fees to manage audit risks and ensure the thoroughness of their audit work. Therefore, this research aims to explain the effect of litigation risk, information asymmetry, and economic uncertainty on audit fees.

Methodology

Our data were collected using financial statements, notes, and audit reports in CODAL^[1] database and Rahavard-e-Novin^[2] software. The final sample for a period of 2013-2021 consists of 1080 firm-year observations. In addition, the GARCH models were employed to measure the independent variables. To test the first and second hypotheses of this research, model 1 is used:
Afee_t= litig risk_t+ Asymmetry_t+ Size_t+ INVREC_t +Lev_t + ROA_t+ loss_t+ CHANGE_t +Adu size_t + Specialist_t+ LIQUID_t + SALE_t +Year Effects+ Industry Effects (1)
To test the third hypothesis of research, model 2 is used:
Afee_t= Economic Growth_t-1+‏ Inflation Rate_t-1+ Exchange Rate_t-1+ Interest Rate_t-1+ Size_t+ INVREC_t +Lev_t + ROA_t+ loss_t+ CHANGE_t +Adu size_t + Specialist_t+ LIQUID_t + SALE_t +Year Effects+ Industry Effects (2)
Where, SIZE represents the natural logarithm of total assets; INVREC denotes the amount of inventory and receivables divided by total assets; Lev indicates total liabilities divided by total assets; ROA signifies net profit divided by total assets; LOSS is assigned 1 if a firm has experienced a loss in any of the last three years, and 0 otherwise; CHANGE is assigned 1 if a firm has changed its auditor, and 0 otherwise; LIQUID represents current assets divided by total assets; SALE represents the ratio of sales to assets; Adu size is a dummy variable that equals 1 if the audit firm was either the Iran Audit Organization (IAO) or Mofid Rahbar (an audit firm belonging to IACPA), and 0 otherwise. SPECIALISR is assigned 1 if the auditor is an industry specialist, and 0 otherwise. Audit Fee (AFEE): is the natural logarithm of the audit fee.
Information Asymmetry (Asymmetry): According to the model of Venkatesh and Chiang (1986).
Economic Uncertainty (RM): Economic uncertainty is the inability of agents to accurately predict the outcomes of decisions. In this research, it has been measured by four indicators, including the fluctuation of economic growth, inflation rate, exchange rate, and interest rate. In addition, a GARCH model was used to index these criteria. For this purpose, a volatile measure of changes in the Gross National Product (GNP) index was considered to be an indicator of the risk of macroeconomic factors that the firm faces in its financial and production decisions. The results of the estimation of the GARCH model led to conditional variances, which ultimately lead to the standard deviation or the concept of uncertainty upon taking the square root.
Litigation Risk (Litig risk): We measure this variable based on Lowry and Shu (2002), Krishnan and Zhang (2005), and Sun and Liu (2011).

Conclusion

The results of testing the first and second hypotheses indicate that the risk of lawsuits and information asymmetry have a positive and significant relationship with audit fees. In the third hypothesis, the effect of lack of economy on remuneration was investigated. In this research, four indicators including economic growth, inflation rate, exchange rate, and interest rate have been used to measure the economic uncertainty of macroeconomic variables. In this regard, the results of the hypothesis testing show that economic uncertainty based on inflation and economic growth criteria has a positive and significant relationship with audit fees. Additionally, economic uncertainty based on interest rate criterion has a negative and significant relationship with audit fees. However, the exchange rate indicator does not have a significant effect on audit fees. Therefore, it can be seen that audit risk as an indicator of determining audit fees is influenced by some economic variables such as inflation and economic growth.
In order to strengthen the results and address potential endogeneity in the research models, we redefined the dependent variable as imaginary (bivariate) and re-estimated the initial models of all three hypotheses. The results of these re-estimations confirmed the findings of the least squares regression in the first model for the first and second hypotheses. In the third hypothesis regarding economic uncertainty, economic growth and inflation rate criteria, as well as exchange rate, lead to an increase in the audit fee, while interest rate causes a decrease in the audit fee. Additionally, new control variables were added to the initial models based on the information provided in previous sections. The results of these additions confirm the findings of the initial estimation of the hypotheses.
 
 
 
 

Abstract The purpose of this study is to investigate the relationship between financial report readability and stock return synchronicity with the moderating role of institutional ownership and information asymmetry in companies listed in the Tehran Stock Exchange (TSE). This research is in terms of its purpose. Its period is from 2015 to 2019, and the selected sample consists of 171 companies listed in TSE. To test the research hypotheses through panel data, the ordinary least squares regression method in Eviews software was used. The findings of the research hypothesis test show that there is a negative and significant relationship between financial report readability and the stock return synchronicity. Also, institutional ownership as a moderating variable negatively correlates the illusion of financial report readability and the synchronization of stock prices. Additionally, the moderating effect of the information asymmetric variables on the relationship between the financial report readability and the price synchronization is positive and significant. 
According to the findings, on the one hand, it is necessary to examine the implications of financial report readability. On the other hand, in order to improve the market, more attention needs to be paid to the issues affecting the stock return synchronicity.

Abstract Interest groups, especially shareholders have demand for Disclosure and Reporting in the capital market and they change their expectations of risk and return based on disclosure of information. Therefore, disclosure has economic consequence for companies that according to the empirical literature, cost of capital, information asymmetry and stock liquidity, there are three important consequences of disclosure and reporting. One of the disclosures of companies is risk disclosure in the capital market, especially for banks and financial and credit institutions which it require in the form of financial statements and the Report of the Board to the Stock Forum based on complies with the regulations of the Stock Exchange and the Central Bank of Iran. In this paper, we survey the effect of risk disclosure in bank listed in stock market on cost of capital, information asymmetry and stock liquidity as three important of risk disclosure consequences. For this aim, by using the annual data of 18 banks listed in Tehran Stock Exchange during the years 1390 to 1395 we estimate simple regression with panel data. The results show the main hypothesis (there is a consequential risk disclosure of the banks listed in the stock market), confirms. In addition, risk disclosure has a positive and significant relationship with cost of capital and information asymmetry, but there is no significant relationship between risk disclosure and stock liquidity.

Abstract Voluntary disclosure is a surplus information on the legal requirement that includes financial and non-financial information for the more clarity of the company's processes. Voluntary disclosure as a kind of informed mechanism may be associated with different processes in the company. As a result, companies, based on the composition of their board of directors, make decisions about the voluntary disclosure of information and may vary according to the type of political and non-political directors. The purpose of this study was to investigate the effect of political connection on the information voluntary disclosure in companies listed in Tehran Stock Exchange. In this regard, numbers of 124 companies were selected for the period from 2012 to 2017. To measure voluntary disclosure, the Botosan (1997) checklist and for measuring political connections, political cost index from Faccio (2006) has been used. The panel data approach was also used to test the research hypotheses. The results showed that political connection has a negative and significant effect on the voluntary disclosure of information. In fact, companies that have more political connection are more inclined to voluntarily disclose information.

Abstract In this study, the effect of business strategy on the Company's Information Environment (Information Asymmetry, stock returns Volatility, Earning Forecast Errors), is studied. Also to determine the type of companies' selected strategy (prospective or defensive), the Ittner and Larcker )1997) scoring system is used. For statistical analysis, multivariate regression used and control variables (firm size and financial leverage) is also used in models. The study period, is the period (2011) to (2015) and a sample of 168 companies listed on the Tehran Stock Exchange is used. The results indicate that a positive and significant relationship exists between the company's business strategy and Information Environment (Information Asymmetry, stock returns Volatility, Earning Forecast Errors) so that the more prospective business strategy, brings more information asymmetry, more stock returns Volatility and more Earning Forecast Errors

Abstract Abstract
The purpose of the present study is to investigate the relationship between information asymmetry and mispricing of accruals in Tehran Stock Exchange. Hence, we hypothesize that there is a significant positive relationship between the level of information asymmetry and mispricing of accruals. We implement Mishkin test and classification of portfolios method to respectively investigate whether there is any mispricing of accruals and its relationship with information asymmetry. Furthermore, the indirect balance sheet approach and bid-ask spread have been utilized to measure respectively accruals and information asymmetry. Thus, information of 82 entities during the time span of 5 years between 2008 to 2012 have been analyzed to test our hypothesis. The results depict that as the level of information asymmetry enhances, the difference between coefficients of predictions and evaluation of accruals in the Mishkin test increases. In other words, as the level of information asymmetry increases, the mispricing of accruals intensifies.

Abstract The purpose of this study is to examine the impact of Audit Committee Quality (ACQ) on achieving Internal Control over Financial Reporting (ICOFR) in short run. So, the current paper investigates the impact of ACQ on Financial Reporting Quality (FRQ) including Reliability, Relevance and Timelines of financial reporting That is Information Asymmetry (IA) as the final goal of financial reporting. Regarding the latent of ACQ and FRQ, this paper use structural modeling with OLS approach by Smart-PLS software. Findings indicate that ACQ reduces IA. However, there is no relationship between ACQ and FRQ. It was also revealed that FRQ reduces IA.

Abstract On the basis of Pecking Order Theory, when firms need resources
they usually rely on debts since capital is considered expensive due to
information asymmetry. Moral hazard is a kind of information
asymmetry; therefore, it is expected that it has relationship with
capital structure. The purpose of this study is to investigate the impact
of moral hazard on capital structure. In order to conduct the research
132 firms were selected from listed firms in Tehran Stock Exchange
between years 2006_2012.research hypothesis was tested using
structural equation model. The results show that moral hazard has
significant negative impact on capital structure, and the negative effect
of moral hazard on capital structure is moderated by control variables

Abstract The purpose of this research is to examine both the relationship between accounting conservatism and level of investment under the need or no need of financing conditions and the impact of ultimate ownership on this association. The statistical society of the present research contains 103 companies selecting from all companies listed in Tehran Stock Exchange using removal method over the time span of 2006-2010. Combined data method with fixed effect has been used in order to test the research hypothesis. The result depicts that the association between conservatism and investment is significantly negative when a firm do not need external financing. Nonetheless, this association is significantly positive in companies which need external financing. Furthermore, we find that the relationship between conservatism and investment in the companies whose ultimate ownerships controller is governmental or semi governmental firms is significantly negative. Thus, when the agency problem is enhancing, conservatism acts as a mechanism to decrease this problem and engenders reduction in investment cost

Abstract The purpose of this research is to examine both the relationship between accounting conservatism and level of investment under the need or no need of financing conditions and the impact of ultimate ownership on this association. The statistical society of the present research contains 103 companies selecting from all companies listed in Tehran Stock Exchange using removal method over the time span of 2006-2010. Combined data method with fixed effect has been used in order to test the research hypothesis. The result depicts that the association between conservatism and investment is significantly negative when a firm do not need external financing. Nonetheless, this association is significantly positive in companies which need external financing. Furthermore, we find that the relationship between conservatism and investment in the companies whose ultimate ownerships controller is governmental or semi governmental firms is significantly negative. Thus, when the agency problem is enhancing, conservatism acts as a mechanism to decrease this problem and engenders reduction in investment cost.

Abstract The purpose of the present study is to investigate the relationship between information asymmetry and mispricing of accruals in Tehran Exchange Market. hence, we hypothesize that there is a significant positive relationship between the level of information asymmetry and mispricing of accruals. we implement Mishkin test and classification of portfolios method to respectively investigate whether there is any mispricing of accruals and its relationship with information asymmetry. Furthermore, the indirect balance sheet approach and bid-ask spread have been utilized to measure respectively accruals and information asymmetry. Thus, information of 82 entities during the time span of 5 years between 2008 to 2012 have been analyzed to test our hypothesis. The results depicts that as the level of information asymmetry enhances, the difference between coefficients of predictions and evaluation of accruals in the Mishkin test increases. In other words, as the level of information asymmetry increases, the mispricing of accruals intensifies.

Abstract Information uncertainty has been an old topic in finance literature. Information uncertainty means ambiguity about a firm’s fundamental value, which may arise from two conventional sources: 1) characteristics of the business or industry, and 2) the company’s disclosure policy. The first source related to growth options and second source related to information asymmetry. From investors’ perspective the mechanisms and outcomes of every source are quite different. In this research we use from earning forecast dispersion as a proxy for measuring information uncertainty. We use stock turnover and price impact as proxies for information asymmetry. To control firm’s growth options, we use firm age, market-to-book ratio, and capital expenditure over total assets and Tobin’s Q. We use panel data regression model to analyze information. Our results indicate that information uncertainty has a positive relationship with information asymmetry and growth options.

Abstract If the information asymmetry exists، some investors have private and confidential information about companies more and better than other investors .
Information asymmetry cause inefficient information flow which can influence company's future returns. This study investigates the impact of information asymmetry and the company's life cycle on future stock returns. With a sample of 670 firms - year regarding 67 companies listed in Tehran Stock Exchange during the period 1380-1389, we tested the hypothesis using multivariate linear regression model based on panel data. The findings of this study indicate that there is a significant negative relationship between information asymmetry and futures stock returns. In fact, with increasing asymmetry of information, future returns of stocks of companies decreased. Another result of study shows there is a significant positive relationship between year life cycle and future stock returns. In other words, with the increase in corporate life, the future stocks returns also increases.

Abstract Regarding the critical role of liquidity in asset price discovery, sharing of financial risk, increasing of expected return and transaction costs reduction, it is important to know about the effective factors. This study examines the effects of the quality of corporate disclosure   on stock liquidity. Because increasing disclosure quality reduces information asymmetry and reducing information asymmetry increases market liquidity, so the main hypothesis of this study is that disclosure quality has effect on stock liquidity.  In this study, for separating various details impacts of disclosure quality, we used timeliness and reliability and to determine stock liquidity, we used 15 different trading and information liquidity measures. 112 Tehran Security Exchange listed companies, from 1384 to 1388 are chosen and research hypothesis was tested by linear multivariable regression in pre and post-test. The results indicate that disclosure quality has positive effect on stock liquidity.  Also, they show positive effect of reliability on stock liquidity.

Abstract This paper studies the relationship between information asymmetry and accounting conservatism in financial statements. Information  asymmetry   between   informed   and  uninformed equity  investors  creates  an  agency  cost  that  increases  the equilibrium return on the firm's equity. This effect gives parties to the firm an incentive to generate a mechanism that reduces information asymmetry. In the other hands Conservatism reduces the manager's incentives and ability to manipulate accounting numbers and then reduces the agency costs. Our empirical tests express that information asymmetry among equity investors is significantly positively related to conservatism. Further our tests confirm that changes in information asymmetry between equity investors lead changes in conservatism but conservatism doesn't lead to information asymmetry. This result rejects the FASB proposition that conservatism produces information asymmetry among investors.