Financial Accounting
Abbas Aflatooni; Mohamad Khatiri
Abstract
Recent research has increasingly focused on earnings management through the classification shifting of income statement items. However, domestic studies have only minimally addressed this topic. While international research has extensively examined the impact of the COVID-19 pandemic on earnings management, ...
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Recent research has increasingly focused on earnings management through the classification shifting of income statement items. However, domestic studies have only minimally addressed this topic. While international research has extensively examined the impact of the COVID-19 pandemic on earnings management, there is a notable lack of empirical evidence concerning Iranian firms. This study investigates the presence of earnings management through classification shifting in Iranian firms, comparing the phenomenon during the COVID-19 outbreak with other periods. The analysis utilizes data from 137 firms listed on the Tehran Stock Exchange, covering 2012 to 2023, resulting in 1,644 observations. The models are estimated using the generalized least squares (GLS) approach, controlling for year and industry effects. The findings confirm the existence of earnings management through classification shifting among Iranian firms. Moreover, the results indicate that this practice intensified during the COVID-19 pandemic compared to other years. Robustness tests, which employed different time frames for the pandemic and decile-ranked values for research variables, corroborate the study's main findings. IntroductionResearch on earnings management surged following Enron's collapse in 2003, focusing on accrual-based earnings management, real earnings management, and classification shifting. Managers use accruals, manipulate business activities, and reclassify income statement items to influence reported earnings. Most studies have concentrated on accrual-based and real earnings management, with limited attention given to classification shifting.The COVID-19 pandemic profoundly impacted earnings management by increasing financial distress and firms’ reliance on external resources, thereby motivating firms to present more favorable financial images. While evidence from developed countries highlights the pandemic's impact on earnings management, research on Iranian firms remains scarce.This study aims to fill this gap by examining classification shifting among Iranian firms and assessing the influence of COVID-19. It contributes to the earnings management literature by providing empirical evidence of classification shifting in the Iranian context. Furthermore, it enhances the existing literature on the impact of macroeconomic events and crises by demonstrating the intensifying effect of COVID-19 on classification shifting. In light of the above, the objective of this research is to examine the impact of COVID-19 on earnings management through the classification shifting of income statement items.Literature ReviewAccording to McVay (2006) and Saghafi and Jamalianpour (2018), managers can unexpectedly increase operating income by reclassifying operating expenses as non-operating expenses and non-operating income as operating income, thereby reporting lower non-operating income. In fact, a positive relationship between the size of the reduction in non-operating income and the increase in unexpected operating income can indicate the existence of classification shifting aimed at earnings management. On the other hand, since the phenomenon of earnings management has intensified during the COVID-19 pandemic (Deloitte, 2020; Chen et al., 2023), it is predicted that the COVID-19 outbreak will strengthen the positive relationship between the size of the reduction in non-operating income and the increase in unexpected operating income. To examine this issue, the first hypothesis of the research is formulated as follows:Hypothesis I: With the outbreak of COVID-19, the positive relationship between the size of the reduction in non-operating income and unexpected operating income for the current year is strengthened.There might be ambiguity regarding whether the positive relationship between reduced non-operating income and unexpected operating income is due to actual economic changes or opportunistic managerial behavior (McVay, 2006). McVay (2006) clarifies that if opportunistic classification shifting increases operating income in one year, it will not do so the following year if not repeated, leading to lower unexpected operating income. Conversely, if the change is due to real economic factors, the increase will persist. A negative relationship is expected between reduced non-operating income and changes in unexpected operating income the following year, an effect that may be intensified by COVID-19 (Taylor et al., 2023). The second research hypothesis is formulated to examine this:Hypothesis II: With the outbreak of COVID-19, the negative relationship between the size of the reduction in non-operating income for the current year and changes in unexpected operating income for the following year is strengthened.MethodologyIn this study, data were collected from the Rahavard Novin database and Codal website and analyzed using Stata software. The generalized least squares (GLS) approach was used to estimate the models while controlling for the fixed effects of years and industries. Clustering correction at the firm level was applied to control for heteroscedasticity and autocorrelation of errors. Rank-decile values of variables were used in robustness tests to control for outliers and non-linear relationships. The statistical population included all firms listed on the Tehran Stock Exchange from 2012 to 2023, excluding those in insurance, banking, financial investment, holding, and leasing industries. Firms with fiscal years ending in March and no changes during the study period were selected, resulting in 137 firms (1,644 firm-years) across 13 industries. Data from three prior periods (2009-2011) were also used, with variables winsorized at the 1st and 99th percentiles.ResultsThe results indicate that, with the outbreak of COVID-19, both the positive relationship between the size of the reduction in non-operating income and unexpected operating income, and the negative relationship between the size of the reduction in non-operating income and changes in unexpected operating income, have been strengthened. These results are consistent with the first and second hypotheses of the research, respectively.DiscussionWhile academic literature often focuses on earnings management through discretionary accruals and real business activities, it has largely overlooked classification shifting. Domestic research in this area is also scarce. The first part of this study indicates that classification shifting is common among Iranian firms. Although studies in developed countries show COVID-19's impact on accrual-based and real earnings management, there is limited empirical evidence from Iran. The second part of the study reveals that classification shifting intensified during the COVID-19 pandemic, consistent with findings from Hsu and Yang (2022), Yan et al. (2022), Aljughaiman et al. (2023), and Taylor et al. (2023).ConclusionGiven the research findings indicating the prevalence of earnings management through classification shifting and the increasing effect of COVID-19, shareholders and investors should, especially during crises, avoid behavioral consistency and anchoring on net and operating income figures. They should carefully examine classification shifts in financial statements and use more comprehensive analyses that include non-operating items to obtain a more accurate picture of financial performance during crises. Auditors should design specific tests to identify earnings management through classification shifting and enhance review quality during crises. External regulatory bodies should not reduce supervision but instead implement stricter regulations to oversee financial report quality and disclosure, ensuring firms provide greater transparency. Less supervision and less transparent reporting can exacerbate economic fluctuations during crises. These measures can help maintain and increase transparency and trust in financial markets and ensure optimal use of resources.
stock exchange
Leila Farvizi; Sakineh Sojoodi; Hossein Asgharpour; Jafar Haghighat
Abstract
Numerous studies have investigated the relationship between systematic risk and a wide range of accounting and financial variables. However, most empirical studies have adopted the classical regression method, which entails limitations such as a restricted number of variables to preserve degrees of freedom. ...
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Numerous studies have investigated the relationship between systematic risk and a wide range of accounting and financial variables. However, most empirical studies have adopted the classical regression method, which entails limitations such as a restricted number of variables to preserve degrees of freedom. To overcome this constraint, the present study employs the Bayesian Model Averaging (BMA) method. Using data from 55 companies listed on the Tehran Stock Exchange between 2010 and 2023, this study examines the influence of 58 different financial and accounting variables on the systematic risk of these companies. The research aims to identify the key variables that significantly contribute to systematic risk. The findings reveal that among the examined variables, company size has the strongest impact on systematic risk, with a positive coefficient. In second and third place, asset turnover and operational efficiency demonstrate significant effects, with the former exhibiting a positive coefficient and the latter a negative coefficient. The fourth influential variable is the ratio of long-term debt-to-equity, showing a positive coefficient. Lastly, the ratio of a company's market value to the book value of its total assets is identified as the fifth influential variable, exerting a negative impact on systematic risk. IntroductionUnderstanding the drivers of systematic risk is crucial for investors seeking to optimize their portfolios and for companies aiming to develop robust risk management strategies. While many studies have explored the relationship between systematic risk and various accounting and financial variables, the majority have used classical regression methods, which tend to focus on a limited number of factors. This limitation often overlooks the complex interplay among variables that could better explain systematic risk. Given the growing need for more accurate models in the face of financial market volatility, this study adopts the Bayesian Model Averaging (BMA) approach to assess the impact of a wider range of accounting and financial variables on systematic risk. The research seeks to answer the following questions:Research Question(s)- Which accounting and financial variables most significantly influence the systematic risk of companies listed on the Tehran Stock Exchange?-Do the selected variables have a positive or negative impact on systematic risk, and how do these effects vary across different industries and financial contexts?2- Literature ReviewSystematic risk, commonly measured by the beta coefficient, represents the portion of a company’s risk that cannot be diversified away. Previous studies have highlighted several accounting and financial factors, including company size, financial leverage, operational efficiency, and asset turnover, as important determinants of systematic risk (Figure 1). However, the results across studies are mixed, and traditional models often fail to account for the complex interactions among variables. Additionally, several studies have noted that the method of variable selection and estimation can significantly influence the conclusions drawn about risk determinants. The literature suggests that large firms tend to have higher systematic risk due to greater exposure to market and economic cycles, while smaller firms may experience lower risk due to reduced exposure to such fluctuations. Other studies have explored the roles of profitability, debt ratios, liquidity, and asset management in determining market risk, but there is no consensus on which variables are most influential. Figure1- Fundamental Factors Affecting Systematic RiskSource: Brimble & Hodgson (2007) 3- MethodologyThis study employs the BMA technique to assess the impact of 58 potential accounting and financial variables on systematic risk. The BMA approach is particularly well-suited to this context because it enables the simultaneous consideration of multiple models, allowing for a more comprehensive understanding of the relationships between variables and risk. The study uses data from 55 companies listed on the Tehran Stock Exchange, covering the period from 2010 to 2023. The sample includes companies from a range of sectors, ensuring that the findings are not limited to any one industry. Data were collected from financial statements and reports available on the official website of the Tehran Stock Exchange (TSETMC), and the BMA method was implemented using Stata 18 software. The estimation process includes backward sampling, in which weak models are sequentially excluded and the best models are selected based on their posterior probability of explaining the data.4- ResultsThe results of the BMA analysis indicate that several variables have a significant impact on systematic riskCompany Size: Company size has the strongest effect on systematic risk, with a positive coefficient, indicating that larger companies generally face higher systematic risk.Asset Turnover: The asset turnover ratio, which measures how efficiently a company uses its assets to generate revenue, also has a positive effect on systematic risk.Operational Efficiency: Companies with higher operational efficiency exhibit lower systematic risk, as indicated by the negative coefficient for operational efficiency.Long-Term Debt-to-Equity Ratio: A positive relationship is found between the long-term debt-to-equity ratio and systematic risk, suggesting that companies with higher leverage tend to experience greater exposure to market risk.Market Value to Book Value Ratio: This ratio has a negative effect on systematic risk, indicating that companies with higher market valuations relative to their book values are less sensitive to market fluctuations.These variables were identified as the most significant based on their posterior inclusion probabilities (PIP), with company size having the highest PIP of 0.8143, indicating it is the most important determinant of systematic risk.5- DiscussionThe findings suggest that company size plays a pivotal role in determining systematic risk. Larger companies tend to be more exposed to broader economic fluctuations and market cycles, which can lead to higher systematic risk. Asset turnover, though generally considered a measure of operational efficiency, also contributes positively to risk, potentially due to the increased exposure of firms with higher asset turnover to volatile markets. Operational efficiency, on the other hand, shows a negative relationship with systematic risk, supporting the notion that companies with better control over their operations are more resilient to market shocks. This finding is consistent with the literature suggesting that operational efficiency can mitigate the impact of external risks. Similarly, the positive relationship between the long-term debt-to-equity ratio and systematic risk aligns with prior studies that highlight the role of financial leverage in amplifying market risk. Finally, the negative relationship with the market value to book value ratio indicates that investors view companies with higher market valuations as more stable, potentially because these companies are perceived as less vulnerable to market downturns.6- ConclusionThis study contributes to the understanding of the determinants of systematic risk by employing the BMA approach, which overcomes limitations inherent in traditional regression models. The results highlight that company size, asset turnover, operational efficiency, the long-term debt-to-equity ratio, and the market value to book value ratio are the key factors influencing systematic risk. These findings have practical implications for investors and corporate managers seeking to mitigate exposure to market risk. Companies, especially larger ones, can benefit from enhancing operational efficiency and optimizing their financial structures to reduce systematic risk. Future research could explore the interaction between these variables across different sectors and market conditions, and further refine models by incorporating additional macroeconomic factors.
Capital Structure
Sarah Mohsin; Narges Hamidian; Seyed Abbas Hashemi
Abstract
Stock price crash risk, defined as an adverse event, is a pervasive phenomenon at the market level. This implies that theStock price crash risk, defined as an adverse event, is a pervasive phenomenon at the market level. This implies that the decline in stock prices is not limited to a specific stock ...
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Stock price crash risk, defined as an adverse event, is a pervasive phenomenon at the market level. This implies that theStock price crash risk, defined as an adverse event, is a pervasive phenomenon at the market level. This implies that the decline in stock prices is not limited to a specific stock but extends across the entire market. Stock price crashes result in significant losses for shareholders and investors, as well as a decline in the overall capital market. Hence, understanding the factors influencing this phenomenon is of critical importance. The present study aims to investigate the impact of industry operating cash flow volatility on future stock price crash risk, considering the roles of economic policy uncertainty and conditional conservatism in companies listed on the Tehran Stock Exchange. A sample of 136 companies was selected using a screening method over the period from 2012 to 2022. To analyze the data and test the hypotheses, regression analysis and panel data techniques were employed. The findings indicate that industry operating cash flow volatility has a positive and significant effect on future stock price crash risk. Furthermore, economic policy uncertainty amplifies the positive effect of industry operating cash flow volatility on stock price crash risk. Conversely, conditional conservatism in accounting mitigates the positive relationship between operating cash flow volatility and future stock price crash risk. IntroductionThe expansion of the capital market is a cornerstone of economic growth and development for any country. A critical driver in advancing this sector is fostering active investor participation. To this end, ensuring transparency and providing access to relevant information for evaluating optimal investment opportunities, while considering the risk-return profile of various stocks, are essential for capital market participants. Among the risks faced by the capital market, stock price crash risk stands out as a significant concern. This risk, defined as a sharp and widespread decline in stock prices across the market, transcends individual stocks and affects the market as a whole. The implications of such crashes are profound, leading to substantial losses for shareholders and investors and potentially undermining the overall stability of the capital market. Consequently, identifying and understanding the factors that contribute to this phenomenon is of paramount importance. This study seeks to examine the effect of industry operating cash flow volatility on the future risk of stock price crashes. Furthermore, it incorporates the moderating roles of economic policy uncertainty and conditional conservatism in companies listed on the Tehran Stock Exchange. Literature ReviewThe existing literature suggests that stock price crashes result from efforts to conceal negative information within companies. This conclusion is based on the principal-agent theory by Jine and Myers (2006), which posits that management, having control over the flow of information, is motivated to withhold information, often negative, for various reasons over the long term.One of the factors contributing to stock price crash risk is the volatility of operating cash flows (Wang et al., 2022). Stable operating cash flows are a critical component of a company’s healthy and sustainable operations (Sun and Ding, 2020). Companies experiencing high volatility in operating cash flows typically have fewer cash reserves available for operational needs and are more reliant on external financing. For such companies, financing costs are higher, which, in turn, reduces their overall value (Chen and Huberman, 2014). It is essential to consider that external factors, such as macroeconomic and industry-specific conditions, significantly influence corporate decision-making. Management tends to believe that an increase in industry-level operating cash flow volatility exposes the company to a more uncertain external environment. As this volatility rises, capital market participants pay closer attention to the market, leading to a greater impact of negative information disclosures on the company’s future operations and financing decisions. Consequently, management becomes more inclined to conceal negative information, thereby increasing the risk of future stock price crashes.Moreover, heightened economic policy uncertainty exacerbates corporate policy risks, further incentivizing management to hide adverse news and information, which, in turn, increases the risk of stock price crashes (Luo & Zhang, 2020). Additionally, conditional conservatism practices counteract managerial tendencies and motivations to conceal negative information, thereby reducing the likelihood of stock price crashes and mitigating investment risks in equities (Kim & Zhang, 2016). Conditional conservatism is expected to prevent the accumulation of bad news within the company, thus reducing the sudden release of substantial negative information into the market (Pourheidari et al., 2018). Consequently, higher levels of conditional conservatism are associated with a lower accumulation and concealment of bad news, ultimately reducing the risk of stock price crashes (Antonakakis et al., 2013). Based on the above, the research hypotheses are as follows:Hypothesis 1: Industry operating cash flow volatility has a positive effect on future stock price crash risk.Hypothesis 2: Economic policy uncertainty exacerbates the positive effect of industry operating cash flow volatility on future stock price crash risk.Hypothesis 3: Conditional conservatism in accounting weakens the positive effect of industry operating cash flow volatility on future stock price crash risk. MethodologyThis study is categorized as applied research, as it aims to provide practical insights and solutions that can be directly implemented in real-world contexts. Methodologically, it adopts a descriptive-correlational approach, seeking to describe the characteristics of the variables under investigation and analyze the relationships among them. To achieve the research objectives, three hypotheses were formulated. These hypotheses examine the effects of industry operating cash flows volatility on future stock price crash risk, incorporating the moderating roles of economic policy uncertainty and conditional conservatism. The statistical sample consists of 136 companies listed on the Tehran Stock Exchange, observed over a ten-year period from 2012 to 2022. To analyze the data and test the hypotheses, regression analysis, panel data techniques, and Stata 15 software were utilized. ResultsThe analysis of the first hypothesis demonstrates that industry operating cash flow volatility exerts a positive and significant effect on future stock price crash risk. This finding underscores the destabilizing influence of variability in cash flows from core business operations, which can signal underlying financial instability and heighten the likelihood of abrupt and severe declines in stock prices. The results of the second hypothesis indicate that economic policy uncertainty intensifies the positive relationship between industry operating cash flow volatility and future stock price crash risk. This suggests that in an environment characterized by heightened economic policy uncertainty, the risks associated with cash flow variability are magnified. Unpredictable policy conditions can create additional pressure on management to obscure negative information in an effort to sustain investor confidence, further exacerbating the risk of stock price crashes. Finally, the findings related to the third hypothesis reveal that conditional conservatism in accounting mitigates the positive effect of industry operating cash flow volatility on future stock price crash risk. Conditional conservatism, characterized by the timely recognition of potential losses and liabilities over gains, serves as a counterbalance to managerial tendencies to suppress unfavorable information. By enforcing stringent accounting standards, conditional conservatism enhances the transparency and reliability of financial reporting, thereby attenuating the impact of cash flow volatility on crash risk and fostering greater stability in the capital market. ConclusionThis study examines the effect of industry operating cash flow volatility on future stock price crash risk, with a focus on the moderating roles of economic policy uncertainty and conditional conservatism in companies listed on the Tehran Stock Exchange. The findings of the first hypothesis reveal that volatility in operating cash flows signals potential risks related to a company’s future operations, investments, and financial activities. Moreover, such volatility may incentivize management to withhold adverse information, thereby increasing the likelihood of future stock price crashes. The results of the second hypothesis suggest that elevated economic policy uncertainty intensifies the risks associated with firm policies, further motivating management to conceal unfavorable information. This heightened opacity exacerbates the probability of stock price crashes, reflecting the amplified impact of cash flow volatility under uncertain policy environments. In contrast, the findings of the third hypothesis indicate that conditional conservatism in accounting practices mitigates the positive relationship between operating cash flow volatility and future stock price crash risk. By emphasizing the timely recognition of losses and liabilities over gains, conditional conservatism acts as a counterbalance to managerial tendencies to suppress negative information, thereby reducing the impact of operating cash flow volatility on crash risk. These findings align with prior research by Wang et al. (2022), Lu Zhang (2020), and Kim and Zhang (2016), further validating the theoretical and empirical linkages among operating cash flow volatility, policy uncertainty, and conditional conservatism in mitigating stock price crash risk.
Financial Accounting
Shadi Hasanzadeh; Khadijeh Eslami; Mana Farahi
Abstract
Today, knowledge, innovation, and technology play a crucial role in economic growth and development. Among the key factors influencing innovation, the security of intellectual property rights stands out as both essential and challenging. This study examines the impact of intellectual property protection ...
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Today, knowledge, innovation, and technology play a crucial role in economic growth and development. Among the key factors influencing innovation, the security of intellectual property rights stands out as both essential and challenging. This study examines the impact of intellectual property protection on innovation, considering the mediating roles of research and development (R&D) expenditures and financial constraints. The analysis covers 119 companies listed on the Tehran Stock Exchange from 2018 to 2022, using a correlation-analytical approach. The results of hypothesis testing, based on a regression model, indicate that intellectual property protection fosters innovation within companies. Additionally, R&D expenditures and financial constraints act as mediating factors in this relationship. The findings suggest that strengthening intellectual property protection shields innovators from imitation and theft, encouraging companies to invest more in innovation. By securing exclusive rights, firms can achieve higher profitability and returns on investment. Furthermore, confirming the mediating effects of R&D expenditures and financial constraints highlights that increased intellectual property protection generates positive feedback for investors, thereby reducing financial constraints. This, in turn, allows for greater budget allocation to innovation. These insights can assist policymakers, standard-setters, and legislators in refining national strategies by deepening their understanding of the benefits and challenges associated with intellectual property protection. By implementing targeted incentive policies, they can encourage capital market participants to drive innovation and enhance corporate innovation activities.IntroductionIn today's world, innovation serves as the primary driving force behind economic and social progress, holding an unrivaled position in global competition. Companies, as key players in this landscape, strive to secure their survival and future by generating new ideas and transforming them into innovative products and services. As a result, innovation has become a strategic necessity for business growth and sustainability (Yu et al., 2021; Li et al., 2021).Intellectual property (IP) refers to human intellectual creations and initiatives that, beyond their intangible nature, hold significant economic value. Both national legal systems, such as Iran’s Property and Documents Registration Organization, and international bodies, such as the World Intellectual Property Organization (WIPO), have established frameworks to protect IP rights (Namazi and Khorramdel, 2022). Various theories have been proposed to justify and define the exclusivity of intellectual property rights (IPR) and the necessity of IP protection. Among the most prominent are the Incentive for Creation theory and the Compensation for Public Disclosure theory (Liu et al., 2024).The relationship between IPR and innovation is complex and non-linear, influenced by multiple factors, particularly research and development (R&D) expenditure and financial constraints. R&D expenditure reflects a company's commitment to technological progress and product development, playing a critical role in transforming ideas into market-ready innovations. Conversely, financial constraints act as a major barrier to innovation, significantly limiting a company’s ability to generate and develop new ideas (Liu et al., 2024).Given these dynamics and the limited literature on intellectual property within the accounting field, this study aims to explore the relationship between intellectual property protection and corporate innovation. It also seeks to determine whether R&D expenditure and financial constraints mediate this relationship.Literature reviewIn today’s complex and dynamic environment, only companies that continuously generate new ideas and designs can sustain their competitive edge. Identifying key activities that influence the innovation process is, therefore, a fundamental responsibility of company managers (Hudson, 2013; Shea, 2023). One of the critical factors expected to drive innovation in companies is the protection of IPR at both national and international levels. Safeguarding knowledge and innovations derived from R&D across various sectors—including industrial, artistic, and cultural—encourages innovation and contributes significantly to long-term economic growth and development (Liu et al., 2024).Empirical studies further highlight the complex relationship between IP protection and innovation. Yang et al. (2024) found that IP system reforms have a stronger impact on innovation in cities with lower scientific and educational levels compared to central cities with more advanced knowledge infrastructures. Hudson and Minya (2013) argued that this relationship is non-linear, varying based on economic and institutional factors. Sweet and Maggio (2015), using a global sample, found that stronger IP protection enhances innovation only in countries with above-average levels of development and economic complexity. Similarly, Akrami Rad et al. (2023) demonstrated that IP plays a multidimensional role in attracting foreign investment, while Aghaei (2016) found that, although the relationship between IPR and innovation is direct across all countries, it is notably stronger in those with higher per capita income.A review of domestic studies reveals that none have specifically examined the impact of IP protection on corporate innovation. Therefore, the findings of this study can provide valuable insights for policymakers, standard-setters, and legislators, enabling them to enhance national intellectual property protection strategies by better understanding their positive and negative implications for corporate innovation.MethodologyThis study is classified as applied research. The statistical population consists of all companies listed on the Tehran Stock Exchange between 2018 and 2022. The study period is limited to 2022, as data on IPR protection for Iran is only available up to that year.Data for the analysis were collected from company financial statements, while information on IPR protection was sourced from the WIPO website. The final analysis was conducted using EViews 11 software.ResultsThe purpose of this study was to examine the impact of IP protection on corporate innovation, with a focus on the mediating role of R&D expenditure and financial constraints. The results of the hypothesis testing indicate that IP protection fosters innovation in companies. Additionally, the mediating effects of R&D expenditure and financial constraints were confirmed, highlighting their influence on the relationship between IP protection and innovation.DiscussionOne of the most critical factors influencing innovation is the protection of IPR. However, economists remain divided on the precise relationship between IPR protection and innovation.A systematic and influential theory of innovation is presented by Schumpeter, whose concept of creative destruction suggests that IPR protection grants innovators a temporary monopoly, preventing others from imitating their inventions. This exclusivity incentivizes competitors to develop more advanced technologies, thereby fostering continuous technological progress and innovation.Conversely, Helpman (1993) argues that while stronger IPR initially stimulates innovation, in the long run, it may lead to a decline in real innovation rates. As developed countries continue producing goods based on older technologies, resources that could be allocated to innovation and research are instead diverted toward production, ultimately reducing the overall rate of innovation.A more recent perspective comes from Moskus (2000), who highlights a trade-off between knowledge dissemination and innovation incentives. While stronger IPR protection provides a robust incentive for R&D, it simultaneously restricts access to knowledge, potentially limiting opportunities for broader innovation and technological diffusion.Empirical FindingsThe findings of this study support the first research hypothesis, confirming that IP protection significantly influences corporate innovation. These results align with previous studies by Yang et al. (2024), Hudson and Minya (2013), and Sweet and Maggio (2015). These researchers argue that IPR protection enhances the value of R&D investments, particularly in sectors such as environmental protection, where innovation plays a crucial role. When IP protection is weak, firms risk having their innovations imitated by competitors, leading to reduced innovation efficiency, lower profits, and diminished motivation for further R&D.Additionally, the results of the second and third research hypotheses are consistent with the findings of Liu et al. (2024) and Liu et al. (2022). This study confirms that R&D investment and corporate innovation are influenced by information asymmetry. When foreign investors lack sufficient knowledge of a company’s innovation achievements, they may struggle to assess the commercial value of its technologies. However, if companies fully disclose their R&D advancements, competitors may exploit this knowledge and imitate their innovations, reducing firms' incentives to share information. Consequently, many companies choose to limit disclosure of their innovation activities to maintain a competitive advantage (Lily et al., 2017; Liu et al., 2022). ConclusionIn the face of investment uncertainty, investors often rely on a company’s patented technological achievements as a key indicator of its development potential. Higher-quality inventions tend to attract investment more easily, as they signal a greater likelihood of success and return. Strengthening IPR protection can, therefore, reduce the financial constraints faced by companies, enabling them to invest more heavily in innovation and advance their technological capabilities.The findings of the present study align with this reasoning, as the first proposed hypothesis confirms that strengthening IPR protection plays a critical role in promoting organizational innovation.Regarding the second hypothesis, the study reveals that R&D expenses serve as a mediating factor in driving innovation through the protection of intellectual property rights. In other words, investment in R&D is a crucial mechanism through which IPR protection fosters innovation.Furthermore, the results of the third hypothesis demonstrate that financial constraints negatively mediate the relationship between IPR protection and organizational innovation. When companies face funding restrictions, their ability to leverage IPR protection to drive innovation is diminished, thereby inhibiting the development of new technologies and innovative solutions.
Profitability
Reza Malek; Hossien fakhari
Abstract
The significant impact of politics on the capital market has led to a substantial body of accounting and financial research being linked to political events. Accordingly, this study investigates the effect of presidential elections on earnings management, considering the moderating role of ownership ...
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The significant impact of politics on the capital market has led to a substantial body of accounting and financial research being linked to political events. Accordingly, this study investigates the effect of presidential elections on earnings management, considering the moderating role of ownership structure. Data were collected from 122 companies listed on the Tehran Stock Exchange using a systematic elimination method over the period 2005-2022 and analyzed using multivariate regression. The findings indicate that presidential elections have a negative and significant effect on both accrual and real earnings management. Furthermore, when industries were classified based on their political characteristics, results showed that during presidential election years, firms in politically sensitive industries tend to manage earnings through accrual-based methods, while firms in non-political industries rely more on real earnings management. The study also finds that ownership structure—specifically, the proportion of institutional ownership—does not moderate the relationship between presidential elections and earnings management (accrual or real). These findings suggest that during presidential election periods, increased scrutiny from political and social institutions raises the perceived political costs for firms, leading to a reduction in both accrual and real earnings management. Earnings Management, Ownership Structure, Political Control, Political Cost, Presidential ElectionIntroductionThe prominent role of the government in emerging economies highlights its significance in the political and economic systems of these countries (Imani Brandagh & Hashemi, 2018). Furthermore, the impact of macro-political factors on the economic performance of markets, especially capital markets, is considered inevitable (Keshavarz & Rezaei, 2021; Imani Brandagh & Hashemi, 2018). Presidential elections, by creating broad political oversight over managers, such as public scrutiny aimed at judging the economic performance of the ruling political party, oversight by rival political parties seeking to uncover corruption and financial fraud, or increased internal control by the ruling party, raise the political costs for companies. As a result, managers may reduce earnings management to avoid accusations of corruption and financial misconduct (Kim & An, 2021). According to financial literature, these consequences are defined as "political costs," and their increase may create an environment that discourages earnings management (Goncalves et al., 2022; Kim & An, 2021).On the other hand, presidential elections can generate significant political and economic uncertainty, prompting managers to increase earnings management in an attempt to neutralize the effects of these fluctuations (Goncalves et al., 2022; Moshtagh Kahnamoi et al., 2022).This study aims to examine the impact of political costs in Iran’s economic environment, as a significant consequence of presidential elections driven by increased political oversight. The importance of this study in the context of Iran can be discussed from two perspectives: first, the intense political competition among factions and political parties, and second, Iran's state-dominated economy, which is heavily influenced by governmental or quasi-governmental institutions (Fakhari et al., 2021). Literature ReviewKim and An (2021) argue that during presidential elections, increased political scrutiny raises political costs, prompting managers to reduce accrual-based earnings management to avoid accusations of financial misconduct. They attribute this to the easier detection of accrual items compared to real activities (Kim & An, 2021; Fakhari et al., 2015). Similarly, Jain et al. (2021), in their study of nine U.S. presidential election cycles (1980–2012), found that companies manipulate earnings by overproducing in pre-election years and reducing sales-related activities during election years. They also found that firms with higher agency costs reduce real earnings management during elections, while larger firms increase real earnings management in response to political-economic policies and economic uncertainty. MethodologyThis study examines the impact of presidential elections on earnings management (both accrual-based and real) and the moderating role of ownership structure, using multivariate regression over an 18-year period (2005–2022). The data were analyzed using Stata software (version 14). In line with common practices in accounting research, all continuous variables were winsorized at the 1st and 99th percentiles. ResultsThe findings indicate that presidential elections have a significant negative impact on both types of earnings management—accrual-based and real. Specifically, during election years, accrual-based earnings management decreases by 1.4%, and real earnings management decreases by 1.6%. Additionally, the ownership structure (institutional ownership) does not play a moderating role in the effect of presidential elections on earnings management. Furthermore, the findings reveal that the type of earnings management differs between politically connected and non-politically connected firms. Politically connected firms reduce accrual-based earnings management due to its high detectability and the increased political costs associated with it (Kim & An, 2021). However, no significant effect was observed on real earnings management, as the political costs of real earnings management are not as high (Kim & An, 2021). For non-politically connected firms, the findings were precisely the opposite. Consistent with the overall results, the ownership structure did not have a moderating effect in either group examined. ConclusionThe findings indicate that accounting earnings are influenced by the political factor of presidential elections. Additionally, institutional ownership does not affect this relationship. In Iran's state-dominated economy, presidential elections increase political scrutiny from rival political parties, the ruling party, and society, thereby raising political costs. As a result, managers are driven to reduce both accrual-based and real earnings management to avoid financial accusations. Furthermore, politically connected firms refrain from accrual-based earnings management during presidential elections due to its high detectability and the associated political costs; however, they do not react similarly to real earnings management. This behavior stems from heightened political oversight and the increased risk of being accused of financial misconduct (Kim & An, 2021).
stock exchange
Hasan Farajzadeh; Aَfsane Dehghan Dehnavi
Abstract
This study investigates the spillover effects in the disclosure timing of financial statements among peer firms, taking into account the deadlines stipulated by the Executive Regulations on Information Disclosure for registered firms under the Securities and Exchange Organization. The findings reveal ...
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This study investigates the spillover effects in the disclosure timing of financial statements among peer firms, taking into account the deadlines stipulated by the Executive Regulations on Information Disclosure for registered firms under the Securities and Exchange Organization. The findings reveal the presence of peer effects in the disclosure timing of pre-audited interim and annual financial statements, as a result of peer competition to attract market attention and mimicry in disclosure behavior. In contrast, no spillover effect is observed in the disclosure timing of the audited financial statement. Furthermore, the results provide insights into competition for market attention among peer firms when releasing semi-annual audited financial statements for clients audited by non-private audit firms (i.e., the Audit Organization and Mofid Rahbar Institute). This suggests a potential value-added role of non-private audit firms in enhancing the credibility of interim audited financial statements. The presence of a spillover effect in unaudited disclosures, contrasted with its absence in audited disclosures, may be attributed to the higher costs of accelerating the release of audited financial statements and the strategic timing of unaudited disclosures to elicit a desired market response.Introduction and Theoretical BackgroundFinancial disclosure is a critical component of corporate transparency, influencing investor decisions, regulatory oversight, and market efficiency. While prior research has extensively examined the content of financial disclosures, the timing of these disclosures remains an underexplored aspect of corporate strategy. Firms face a trade-off between timely disclosure, which may offer a competitive advantage, and the associated costs, including compliance requirements and managerial discretion.A growing body of literature suggests that firms do not make disclosure decisions in isolation but are influenced by the behavior of their peers. The concept of peer effects posits that firms within the same industry observe and often mimic the timing strategies of their competitors. This imitation may be driven by a desire to manage investor perceptions, respond to competitive pressures, or align with industry norms.The theoretical foundation of this study is rooted in signaling theory and the theory of strategic disclosure. According to signaling theory, firms disclose financial information strategically to convey positive signals to investors and differentiate themselves from competitors. Strategic disclosure theory further asserts that firms adjust their disclosure practices in response to market conditions and the actions of their peers, aiming to maximize market attention and investor confidence.Additionally, research on financial market efficiency suggests that early disclosures receive more market attention than later ones, creating incentives for firms to strategically time the release of their financial statements. Firms that delay disclosures risk negative investor sentiment or diminished market responsiveness. Consequently, understanding the peer-driven dynamics of disclosure timing provides valuable insights into how firms navigate regulatory constraints and competitive pressures.This study aims to fill a gap in the existing literature by examining whether firms align their financial disclosure timing with that of their industry peers, and how this behavior differs between audited and unaudited financial statements. By analyzing disclosure patterns over an extended period, this research sheds light on the broader implications of peer effects in corporate financial communication.Research MethodologyThis study employs a quantitative research design using archival financial data from 242 firms listed on the Tehran Stock Exchange between 2011 and 2022. The analysis is conducted through econometric modeling to measure the relationship between the disclosure timing of focal firms and that of their industry peers. Key variables include the timing of audited and unaudited financial statement disclosures, firm size, leverage, and auditor type. A regression model is used to assess whether firms adjust their disclosure timing based on peer behavior, while controlling for industry and firm-specific factors.Results and FindingsThe empirical findings suggest a strong peer effect in the timing of unaudited financial statements, where firms tend to align their disclosure timing with competitors to attract market attention. This pattern is particularly evident among firms with high market visibility, indicating that competitive pressures influence disclosure timing decisions.However, no significant peer effects are observed in the timing of audited financial statements. This may be attributed to stringent regulatory requirements and the involvement of independent auditors, which limit managerial discretion in disclosure timing. Additionally, firms audited by government-affiliated audit firms demonstrate greater synchronization in their disclosure timing, highlighting the potential influence of audit firm reputation on disclosure strategies.Another notable finding is that firms competing for market attention tend to accelerate their disclosure timing to differentiate themselves from peers. The results indicate that firms operating in highly competitive industries are more likely to engage in strategic disclosure timing to gain a competitive advantage in capital markets.Furthermore, the study finds that firms with larger market capitalization and higher leverage ratios tend to experience longer disclosure delays, reflecting the complexity of financial reporting processes in such firms. These findings support the hypothesis that firms strategically manage disclosure timing based on industry competition and firm-specific characteristics. ConclusionThis study provides empirical evidence that firms engage in strategic disclosure timing influenced by peer behavior. While unaudited financial statements exhibit a strong contagion effect, audited statements do not follow the same pattern, likely due to higher associated costs and regulatory constraints. The findings suggest that firms actively monitor their peers' disclosure practices and adjust their own timing decisions to maximize market attention.From a regulatory perspective, these results highlight the need for policies that consider the competitive dynamics of disclosure timing. Understanding peer-driven disclosure behaviors can help regulators refine disclosure rules to enhance market transparency and prevent firms from manipulating disclosure timing for competitive advantages.The implications of this study extend to both investors and corporate managers. Investors should be aware of the strategic motivations behind disclosure timing, while managers should consider the potential reputational risks associated with delaying financial disclosures. Future research could explore the effects of industry-specific regulations and investor reactions on disclosure timing strategies, as well as the long-term consequences of disclosure timing for firm valuation and market efficiency.
Financial Accounting
Hayder Hussein Nassr; Hamzeh Didar; Gholamreza Mansourfar
Abstract
The aim of this study is to examine the presence of motivations related to the charity, signaling, and socially responsible investment (SRI) hypotheses, as well as the role of financial reporting quality in fostering these motivations, if present. This research is applied in nature and falls within the ...
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The aim of this study is to examine the presence of motivations related to the charity, signaling, and socially responsible investment (SRI) hypotheses, as well as the role of financial reporting quality in fostering these motivations, if present. This research is applied in nature and falls within the descriptive-correlational category, as it explores the relationships between variables. Based on specific criteria and limitations, the screened sample consists of 101 companies listed on the Tehran Stock Exchange during the years 2014 to 2023, which were analyzed using multivariate regression models. The findings indicate that companies' participation in corporate social responsibility (CSR) activities is driven by motivations beyond charitable purposes. Furthermore, financial reporting quality has a positive and significant impact on optimal CSR—those activities driven by investment-related motivations—while it has a negative and significant impact on deviations from optimal CSR, which are driven by signaling motivations. Overall, the results suggest that companies with higher financial reporting quality are less likely to engage in opportunistic signaling through CSR activities. Consequently, CSR in these companies is more aligned with optimal goals, such as investment, profit generation, and enhancing firm value.IntroductionSeveral theoretical frameworks explain how financial reporting quality influences corporate social responsibility (CSR) activities. Legitimacy theory suggests that companies with agency problems may disclose CSR information to rebuild trust. Signaling theory argues that high-quality financial reporting uses CSR to signal transparency and financial health. Stakeholder theory emphasizes that high-quality financial reporting motivates companies to consider stakeholder interests. Agency theory suggests that low-quality reporting may lead companies to use CSR to hide weaknesses. Lys et al. (2015) propose three hypotheses: (1) the charity hypothesis (CSR for societal benefit), (2) the investment hypothesis (CSR to improve performance), and (3) the signaling hypothesis (CSR driven by future prospects or opportunism). This study aims to examine the impact of financial reporting quality on these hypotheses.Research hypothesesCSR activities do not have a significant impact on the company's financial performance.Financial reporting quality has a positive impact on CSR activities motivated by investment purposes.Financial reporting quality has a significant impact on CSR activities driven by signaling motives. Literature ReviewFinancial reporting quality can create different incentives for companies to engage in corporate social responsibility (CSR) activities, with varying motivations depending on the level of reporting quality. According to Lys et al. (2015), these motivations can be categorized into three hypotheses: the charity, investment, and signaling hypotheses.Charity Hypothesis: High-quality financial reporting can lead to CSR activities driven by genuine philanthropic motivations, whereas companies with low-quality reporting might use CSR as a tool to mask managerial or informational weaknesses. The charitable motivation is typically seen as non-strategic in companies with high-quality reporting, but in companies with lower-quality reporting, CSR may serve as a means to manipulate stakeholders' perceptions without a true commitment to society.Investment Hypothesis: Under this hypothesis, CSR activities are viewed as investments aimed at improving financial performance. Companies with high-quality financial reporting treat CSR as a strategic tool to enhance performance, believing it can reduce capital costs, improve reputation, and strengthen relationships with stakeholders.Signaling Hypothesis: CSR activities are used as signals to the market and stakeholders. Companies with high-quality financial reporting use CSR to send positive signals regarding their commitment to social and environmental causes, while companies with poor reporting may use CSR as a misleading signal to compensate for weak financial transparency. MethodologyThis applied, retrospective study focuses on analyzing relationships between various variables using past data. It is descriptive-correlational in nature. A library research method was used to develop the theoretical framework and review the literature. Primary data were collected from sources such as the Rahavard Novin software database, financial statements, company notes, and board of directors' reports. The research population includes companies listed on the Tehran Stock Exchange, with data collected from 2014 to 2023. Based on specific criteria, 101 companies were selected for hypothesis testing during this period. Results and DiscussionThe results of the first hypothesis showed that CSR positively impacts company performance, indicating that motivations beyond charity should be explored in Iranian companies. Financial reporting quality was found to drive CSR activities, supporting the second and third hypotheses related to investment and signaling motives.The second hypothesis confirmed that financial reporting quality positively impacts optimal CSR, with companies using CSR to increase value and profit. This finding is consistent with signaling and stakeholder theories, as companies with high-quality reporting are more motivated to engage in CSR for investment purposes.The third hypothesis showed that financial reporting quality negatively impacts deviations from optimal CSR, suggesting that high-quality reporting reduces opportunistic motives and leads to more genuine CSR efforts. These findings confirm that financial reporting quality promotes investment-driven motivations and reduces opportunistic behavior. ConclusionBased on the results of this study, it can be concluded that companies can improve their performance by engaging in CSR activities, and these activities are driven by motivations beyond philanthropic goals. In this context, financial reporting quality has a positive and significant impact on optimal CSR. This indicates that companies with higher financial reporting quality engage in CSR activities with investment and profit-seeking objectives. Additionally, financial reporting quality has a negative and significant impact on deviations from optimal CSR. This result suggests that companies with higher financial reporting quality are less likely to send opportunistic signals through CSR. As a result, CSR in these companies is more aligned with optimal goals—namely, investment purposes, profit generation, and enhancing company value.AcknowledgmentsWe would like to express our sincere gratitude to all the esteemed professors who assisted the authors in preparing this article.
