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 Abstract

Focusing on competitive strategies is one of the key factors in creating sustainable advantages and increasing firms’ value. Among these, conditional conservatism, as a qualitative characteristic of financial reporting, can influence investors’ perceptions of a company’s performance. The purpose of this study is to examine the moderating effect of conditional conservatism on the relation between competitive strategies (differentiation and cost leadership) and firms’ value. This research is applied in nature and employs a quantitative approach. The statistical population includes companies listed on the Tehran Stock Exchange during the years 2016 to 2023. To test the hypotheses, multivariate regression models and panel data methods were used. The results show that the differentiation strategy has a positive and significant relationship with firms’ value. Conditional conservatism has a negative relationship with firm's value, as it leads to lower recognition of accounting earnings and consequently increases market value. Furthermore, conditional conservatism intensifies the negative effect of differentiation strategy on firm's value. In contrast, the cost leadership strategy has a positive and significant relationship with firm's value, and conditional conservatism strengthens this relationship. The findings suggest that alignment between competitive strategies and the level of conservatism in financial reporting can influence the market’s perception of firm performance and ultimately affect the firm’s value.

Keywords: Conditional conservatism, differentiation strategy, cost leadership strategy, Firms’ value.

1. Introduction

Focusing on competitive strategies is one of the essential factors in creating sustainable advantage, increasing productivity, and enhancing the value of companies' shares. In the turbulent environment of the capital market, companies' strategic decisions must be aligned with the characteristics of financial reporting in order to maintain investor confidence. On the other hand, conditional conservatism, as one of the qualitative characteristics of financial reporting, can affect how investors perceive a company's performance by identifying losses more quickly than profits. This study aims to investigate the moderating role of conditional conservatism in the relationship between competitive strategies (including differentiation and cost leadership) and companies' share value. The results of this study can help to more accurately explain the interaction between strategic management decisions and financial reporting policies in creating value for shareholders.



Research hypotheses

The first hypothesis is that differentiation strategy has a negative and significant relationship with the company's value.

The second hypothesis is that conditional conservatism has a negative and significant relationship with the company's value.

The third hypothesis is that conditional conservatism has a negative and significant effect on the relationship between differentiation strategy and the company's value.

The fourth hypothesis is that cost leadership strategy has a positive and significant relationship with the company's value.

The fifth hypothesis is that conditional conservatism has a positive and significant effect on the relationship between cost leadership strategy and the company's value.

2. Literature Review and Hypothesis Development

In companies with more conservative accounting policies, financial information tends to understate the actual profitability of differentiated activities. This can lead to reduced investor confidence in the effectiveness of the differentiation strategy, especially in markets where financial analysts play an important role in the formation of market value (Ahmed & Duellman, 2007; Obiedallah & El Mahdy, 2025). The reduction in reported profits due to conditional conservatism may cause the market to underestimate the performance of companies with a high differentiation strategy and, as a result, their value is lower than that of similar companies with less conservative reporting policies (Talawa, 2024; Luo, 2025).

Finally, it can be concluded that conditional conservatism, despite its role in improving the reliability of financial reporting, may have a negative effect on the market value of the company in the context of a differentiation strategy. Since conservatism prevents the full reflection of the benefits of innovation and differentiation in financial statements, investors will not be able to fully understand the strategic value of the company. Therefore, conditional conservatism is expected to weaken the relationship between differentiation strategy and company value by moderating this relationship and having a significant negative effect on it (Wu et al., 2025; Obiedallah & El Mahdy, 2025).

Companies that observe conditional conservatism have a lower cost of capital by reducing information asymmetry (Ball, Kothari, & Nikolaev, 2013; Basu, 1997). This can help companies with a cost leadership strategy to attract cheaper financing sources and, as a result, reduce the cost of capital, strengthening the positive impact of this strategy on firm's value (Watts, 2003; Hill & Jones, 2012).

As a result, conditional conservatism strengthens and makes the relationship between cost leadership strategy and firm's value more sustainable by increasing transparency, reducing information risk, and improving investor confidence.

3. Methodology

The present study is of an applied type and has been conducted with a quantitative approach. The statistical population includes companies listed on the Tehran Stock Exchange during the years 2016 to 2023. The required data were extracted from financial statements and market information and analyzed using multivariate regression models and panel data methods. In these models, the direct effect of competitive strategies and conditional conservatism as well as their interactive effect on the value of companies were examined.

4. Results

Findings: The results show that the differentiation strategy has a positive and significant relationship with firms’ value. Conditional conservatism has a negative relationship with firm's value, as it leads to lower recognition of accounting earnings and consequently increases market value. Furthermore, conditional conservatism intensifies the negative effect of differentiation strategy on firm's value. In contrast, the cost leadership strategy has a positive and significant relationship with firm's value, and conditional conservatism strengthens this relationship. The findings suggest that alignment between competitive strategies and the level of conservatism in financial reporting can influence the market’s perception of firm performance and ultimately affect the firm’s value.

5. Conclusion

Conclusion: Overall, the results indicate that conditional conservatism plays an important moderating role in the relationship between competitive strategies and firm's value. Conservatism exacerbates the negative effect of differentiation strategy and strengthens the positive effect of cost leadership strategy. From a theoretical perspective, these findings emphasize the importance of aligning accounting policies with the strategic orientations of the firm and, from a practical perspective, provide guidance for managers, accountants, and investors in selecting appropriate strategies and financial reporting practices to maximize the firm's market value.

Abstract In the contemporary global economic landscape, the importance of environmental, social and governance performance has been increasingly recognized due to its profound impact on the firms operations, growth and performance. ESG performance considers non-financial elements such as climate change and corporate ethics, as these non-financial elements can exacerbate or reduce the vulnerability of markets, so ESG performance can affect risk.On the other hand, the implementation and understanding of environmental, social, and governance activities in different types of companies and among different investors can differ significantly and Accordingly, it affects the understanding of systematic risk and how it is managed in financial markets, so it is essential to pay attention to company-specific factors in this context. The aim of the present study is to investigate the effect of environmental, social, and governance performance on the systematic risk of companies by considering the moderating role of company-specific factors. The present study is applied and descriptive in terms of purpose and is based on the regression analysis method. Data from 166 companies listed on the Tehran Stock Exchange were collected during the years 2014 to 2023 and analyzed using econometric models and Eviews software. The results showed that ESG performance has a significant negative effect on systematic risk, meaning that companies with better ESG performance experience lower systematic risk. Also, company size, company age, and market capitalization strengthen the reducing effect of ESG on systematic risk, while the cost of debt can weaken this effect. Better firms performance of companies in the field of ESG improves transparency, enhances their commercial credibility and reputation. The direct result of this is creating a positive image of the company among stakeholders, improving financial and non-financial stability and consequently reducing the firm 's systematic risk. firm -specific factors can moderate this relationship. Accordingly, it is recommended that corporate managers strive to improve their ESG performance to not only reduce risk but also become more attractive to investors. Investors and policymakers can also use these indicators as a tool for risk management and more informed decision-making.. Also, company size, company age, and market capitalization strengthen the reducing effect of ESG on systematic risk, while the cost of debt can weaken this effect. Better firms performance of companies in the field of ESG improves transparency, enhances their commercial credibility and reputation. The direct result of this is creating a positive image of the company among stakeholders, improving financial and non-financial stability and consequently reducing the firm 's systematic risk. firm -specific factors can moderate this relationship. Accordingly, it is recommended that corporate managers strive to improve their ESG performance to not only reduce risk but also become more attractive to investors. Investors and policymakers can also use these indicators as a tool for risk management and more informed decision-making.. Also, company size, company age, and market capitalization strengthen the reducing effect of ESG on systematic risk, while the cost of debt can weaken this effect. Better firms performance of companies in the field of ESG improves transparency, enhances their commercial credibility and reputation. The direct result of this is creating a positive image of the company among stakeholders, improving financial and non-financial stability and consequently reducing the firm 's systematic risk. firm -specific factors can moderate this relationship. Accordingly, it is recommended that corporate managers strive to improve their ESG performance to not only reduce risk but also become more attractive to investors. Investors and policymakers can also use these indicators as a tool for risk management and more informed decision-making.. Also, company size, company age, and market capitalization strengthen the reducing effect of ESG on systematic risk, while the cost of debt can weaken this effect. Better firms performance of companies in the field of ESG improves transparency, enhances their commercial credibility and reputation. The direct result of this is creating a positive image of the company among stakeholders, improving financial and non-financial stability and consequently reducing the firm 's systematic risk. firm -specific factors can moderate this relationship. Accordingly, it is recommended that corporate managers strive to improve their ESG performance to not only reduce risk but also become more attractive to investors. Investors and policymakers can also use these indicators as a tool for risk management and more informed decision-making.

Abstract The Role of Stock Liquidity on the Relationship Between Executive Internal Debt and Stock Price Efficiency





1. INTRODUCTIO

Stock prices are efficient when information about a stock is released quickly and the information affects stock prices at the same speed. One of the factors affecting the efficiency of stock prices and capital markets is managerial incentives, which significantly affect the investment decisions of companies. In this way, CEOs with higher internal assets (such as company stocks or stock options) are more likely to adopt conservative corporate policies with lower risk, because their personal interests are aligned with the sustainability of the company. This approach leads to greater transparency in information disclosure, which improves the flow of information to the market and increases the efficiency of stock prices. Pensions with defined benefits and deferred compensation are known in financial economics as “internal debt”. Therefore, CEO internal debt is important because it accounts for a significant portion of CEO compensation. (Huang et al, 2022) On the other hand, greater stock liquidity reduces asymmetric information in the market and leads to improved information production. Stock liquidity can increase stock price efficiency by encouraging and stimulating market participants to obtain confidential information about the company (Baharmoghaddam et al., 2015). By paying bonuses, CEOs find more motivation for high performance and more effort to shape the information environment of companies in order to improve stock liquidity. The present study is the first domestic study that examines the relationship between executive internal debt and stock price efficiency by considering the moderating role of stock liquidity on this relationship.



2. MATERIALS AND METHOD

The present study is in the field of positive research and is of the applied type in terms of classification based on the purpose, in terms of nature it is considered as descriptive research and in terms of method it is considered as correlational research. To collect data and information, the library method was used for research literature and in the research data section, reference was made to financial statements, explanatory notes and the monthly magazine of the Stock Exchange. Descriptive and inferential statistics were used to describe and summarize the collected data. In order to analyze the data, first, pre-tests of variance heterogeneity, F-limer test, Hausman test and then to confirm and reject the research hypothesis, multivariate regression test was used using Eviews software. The statistical population of the research includes companies listed on the Tehran Stock Exchange in the period between 1397 and 1403, and based on the systematic exclusion method, 147 companies were selected as the statistical sample of the research to test the statistical hypothesis. Following the research of Huang et al, 2022), the first and second hypotheses of the research are estimated as follows: Hypothesis 1: Internal debt of the executive director affects stock price efficiency. Hypothesis 2: Stock liquidity has a moderating role on the relationship between internal debt of the executive director and stock price efficiency.

3.RESULTS AND DISCUSSI

For the first hypothesis of the research, the probability of the t-statistic for the constant coefficient and the coefficients of the variables of internal debt of the executive director, company size, return on assets, market value to book value of shares, research and development expenses, operating cash flow, dividends paid, capital expenditures, financial recession and advertising on stock price efficiency is less than 5%; therefore, the above relationship is statistically significant. The variable of internal debt of the executive director is negative and significant on stock price efficiency. For the second hypothesis of the research, the probability of the t-statistic for the constant coefficient and internal debt of the executive director, stock liquidity, stock liquidity in interaction with internal debt of the executive director, company size, return on assets, market value to book value of shares, research and development expenses, operating cash flow, dividends paid, capital expenditures, financial recession and advertising on stock price efficiency is less than 5%; therefore, the above relationship is statistically significant. The variables of internal debt of the executive director and stock liquidity in the interaction with internal debt of the executive director on stock price efficiency are equal to (-0.00081 and 0.00011) and are significant, respectively. The absolute value of the coefficient of the stock liquidity variable in the interaction with internal debt of the executive director on stock price efficiency is less than the internal debt of the executive director on stock price efficiency, therefore, the coefficient of the stock liquidity variable has a moderating role on the relationship between the internal debt of the executive director on stock price efficiency.



4. CONCLUSION

The findings of the study in relation to the first hypothesis showed that the internal debt of the CEO has a significant and inverse effect on the efficiency of stock prices. In this regard, it can be argued that CEOs with internal debt, by focusing on a more conservative capital allocation strategy, due to the reduction of executive pensions, are less likely to engage in excessive risk-taking and debtor expropriation and pay more attention to the quality of reporting and reducing the costs of financial misreporting. In fact, CEOs with more internal debt should pay more attention to the company's risk and the costs of financial misreporting that arise in the long run. This can improve the quality of reporting and increase investment efficiency and accurate stock pricing, because high-quality financial reporting can improve investment efficiency and accurate stock pricing by preventing undervaluation and overvaluation. The findings of the second hypothesis also showed that stock liquidity has a moderating role on the relationship between internal executive debt and stock price efficiency, which indicates the intensity of the significant and inverse effect of internal executive debt on stock price efficiency in the light of stock liquidity. In relation to the second hypothesis, it is argued that greater stock liquidity reduces asymmetric information in the market and leads to improved information production. Since investors and financial analysts have more information about companies with higher stock liquidity, their stock prices become more efficient. According to the results of the first hypothesis, it is recommended that companies, with the help of managerial incentives, reform and improve their financial system so that they can quickly provide their financial information to stakeholders. These reforms in the managerial dimension can include improving the pension determination system; deferred benefits and bonuses for managers; It is also recommended that the board of directors of companies increase the preparations for improving price efficiency and reduce the cost of capital by regulating internal debts. According to the results of the second hypothesis, it is suggested to increase derivatives because the development of futures and options to increase liquidity will moderate the negative relationship between managerial debt and price efficiency. It is also recommended to amend the disclosure regulations by requiring the disclosure of details of managers' debt in quarterly reports, along with liquidity indicators, to the Stock Exchange Organization and the Audit Organization as legislative authorities in the field of financial reporting.

Abstract This study aimed to investigate the effect of corporate social responsibility on building managerial empires by considering the moderating role of financial constraints and CEO overconfidence. The statistical population includes companies listed on the Tehran Stock Exchange and the research sample includes data from 105 companies over a 9-year period from 2014 to 2022, which were selected by systematic exclusion. The data were analyzed using multiple regression models and mixed data methods. The results showed that corporate social responsibility has a negative effect on building managerial empires, and this effect is strengthened under financial constraints and CEO overconfidence. The findings indicate that if the CEO pays attention to corporate social responsibility activities, it is possible to improve the company's financial performance, otherwise, shareholders should control CEOs with a history of building value-destroying empires and increase the level of corporate social responsibility disclosure. This research provides a suitable theoretical framework for understanding the relationship between social responsibility and empire building by managers and shows that including the variables of financial constraints and overconfidence can help stakeholders and shareholders exercise effective oversight over CEO activities.

This study aimed to investigate the effect of corporate social responsibility on building managerial empires by considering the moderating role of financial constraints and CEO overconfidence. The statistical population includes companies listed on the Tehran Stock Exchange and the research sample includes data from 105 companies over a 9-year period from 2014 to 2022, which were selected by systematic exclusion. The data were analyzed using multiple regression models and mixed data methods. The results showed that corporate social responsibility has a negative effect on building managerial empires, and this effect is strengthened under financial constraints and CEO overconfidence. The findings indicate that if the CEO pays attention to corporate social responsibility activities, it is possible to improve the company's financial performance, otherwise, shareholders should control CEOs with a history of building value-destroying empires and increase the level of corporate social responsibility disclosure. This research provides a suitable theoretical framework for understanding the relationship between social responsibility and empire building by managers and shows that including the variables of financial constraints and overconfidence can help stakeholders and shareholders exercise effective oversight over CEO activities.

This study aimed to investigate the effect of corporate social responsibility on building managerial empires by considering the moderating role of financial constraints and CEO overconfidence. The statistical population includes companies listed on the Tehran Stock Exchange and the research sample includes data from 105 companies over a 9-year period from 2014 to 2022, which were selected by systematic exclusion. The data were analyzed using multiple regression models and mixed data methods. The results showed that corporate social responsibility has a negative effect on building managerial empires, and this effect is strengthened under financial constraints and CEO overconfidence. The findings indicate that if the CEO pays attention to corporate social responsibility activities, it is possible to improve the company's financial performance, otherwise, shareholders should control CEOs with a history of building value-destroying empires and increase the level of corporate social responsibility disclosure. This research provides a suitable theoretical framework for understanding the relationship between social responsibility and empire building by managers and shows that including the variables of financial constraints and overconfidence can help stakeholders and shareholders exercise effective oversight over CEO activities.

This study aimed to investigate the effect of corporate social responsibility on building managerial empires by considering the moderating role of financial constraints and CEO overconfidence. The statistical population includes companies listed on the Tehran Stock Exchange and the research sample includes data from 105 companies over a 9-year period from 2014 to 2022, which were selected by systematic exclusion. The data were analyzed using multiple regression models and mixed data methods. The results showed that corporate social responsibility has a negative effect on building managerial empires, and this effect is strengthened under financial constraints and CEO overconfidence. The findings indicate that if the CEO pays attention to corporate social responsibility activities, it is possible to improve the company's financial performance, otherwise, shareholders should control CEOs with a history of building value-destroying empires and increase the level of corporate social responsibility disclosure. This research provides a suitable theoretical framework for understanding the relationship between social responsibility and empire building by managers and shows that including the variables of financial constraints and overconfidence can help stakeholders and shareholders exercise effective oversight over CEO activities.

Abstract 1. Introduction

The present study is necessary for several fundamental reasons and is crucial for a better understanding of capital market dynamics. First, it is essential to have a deeper understanding of the factors influencing auditor change, especially in the face of tax avoidance or financial distress. Auditor change is not simply an administrative move, but can be a strong signal of the financial health and governance of a company. If stakeholders are not aware of why and how companies change their auditors in difficult economic conditions, their interpretation of financial reports and market trends will be seriously ambiguous; therefore, conducting this study is absolutely necessary to empower analysts and investors to interpret these signals more accurately and manage risks better. Also, understanding the moderating role of auditor credibility in this process highlights the need for research that helps assess the quality of financial reporting and ensure its credibility. This study also fills an important gap in the knowledge of this area by focusing on tax avoidance and ownership. The link between ownership type, tax avoidance, and auditor change processes is a topic that has been less addressed, but its importance in assessing corporate transparency and accountability is undeniable.

2. Literature Review

Auditors play an important role in influencing management to change auditors. Each country has regulations regarding changing auditors, but there is still debate about the factors that influence a company's decision to change auditors. Changing auditors can occur for reasons such as resignations, dismissals, or serious disagreements between management and auditors. Companies often use changing auditors to conduct opinion shopping, that is, they seek out auditors who are more lenient in providing opinions on the company's financial statements. Various factors such as corporate tax avoidance and non-disclosure of information in this area, as well as the ownership structure of companies, can have an impact on auditor switching. Auditor switching can be explained using agency theory. Agency theory is a contractual concept that explains the relationship between agents (management) and owners (shareholders). This theory helps to reduce information asymmetry between agents and owners, and as a result, increases information transparency and legitimately protects the rights and interests of owners.

3. Methodology

This research is of an applied nature and, in terms of cognitive approach, has adopted the causal correlation method (post-event) due to the study of events after their occurrence. The statistical population under study included companies listed on the Tehran Stock Exchange over a ten-year period (2015-2024). To achieve more accurate comparability, sampling was conducted using systematic exclusion, and only companies with a fiscal year-end in Esfand and no change in their fiscal year-end date during the study period were accepted. Also, companies active in the banking, insurance, and investment sectors were excluded from the sampling. After applying these filters, 142 companies, including 1420 company-years, were selected as the final sample. For data analysis, the mixed panel data method was used using the Eviews 12 software. Since the main dependent variable (auditor change) is a discrete variable with values of 0 and 1, the final analysis was conducted using logistic regression.

4. Results

The results of testing the hypotheses showed that there is a direct and significant relationship between tax avoidance and auditor switching. However, there is no significant relationship between tax avoidance and institutional ownership. The interaction of auditor credibility with tax avoidance has an inverse and significant effect on auditor switching. In fact, auditor credibility plays a moderating role in the relationship between tax avoidance and auditor switching. However, the interaction of auditor credibility with institutional ownership does not affect auditor switching. In fact, auditor credibility plays a moderating role in the relationship between tax avoidance and auditor switching.

5. Discussion

From a theoretical perspective, firms that adopt aggressive approaches to tax avoidance may seek auditors who are more flexible in their approach to tax ambiguities or less resistant to management’s arguments regarding tax law interpretation. This phenomenon could be due to auditor opinion shopping, where firms seek auditors who are aligned with their interests, especially when the current auditor has expressed disagreement or concerns about the firm’s tax positions. Institutional investors, due to the large volume of their investments and the long-term nature of their interests, are expected to play an active role in monitoring the quality of financial reporting and auditor independence. However, the lack of a direct relationship can mean that decisions about changing auditors fall largely within the purview of the company’s audit committee. High auditor reputation or credibility can reduce the strength of the positive relationship between tax avoidance and auditor switching (according to the first hypothesis); in other words, companies that work with a reputable and reputable auditor may be less inclined to switch auditors, even if they are involved in tax avoidance. The effect of institutional ownership on the decision to change auditor is independent of the auditor's credibility or reputation; in other words, whether the company is audited by a highly reputable auditor or a smaller audit firm, the degree of influence of institutional owners on the decision to change auditor does not change.

6. Conclusion

Auditor switching can be done to conceal the aggressive nature of tax avoidance, reduce the likelihood of detection of tax violations, or even to validate a company's specific tax positions in the eyes of regulatory agencies; therefore, the first hypothesis refers to the mechanisms through which companies may achieve their tax avoidance goals by manipulating their regulatory environment (through auditor switching). Institutional ownership alone is not a direct determinant of auditor turnover, but rather its impact on audit quality may be exerted through the overall strengthening of corporate governance structures rather than through direct interference in operational decisions such as auditor turnover. This result could indicate the relative effectiveness of audit committees in carrying out their oversight functions. Auditor reputation acts as a deterrent (or at least a moderating factor) in the vicious cycle of tax avoidance and auditor switching. Auditors with a high reputation, due to their investment in their brand and fear of losing it, are more likely to maintain independence and professional standards and are less likely to succumb to management pressure to accept ambiguous tax interpretations. Institutional owners may take a more pragmatic approach to auditor change decisions, based on specific auditor performance, rather than relying solely on the auditor's overall reputation. This finding could have implications for audit firm strategies as well as for regulatory bodies.

Abstract Abstract

Purpose: This research investigates the impact of financial disclosure complexity on the reaction of the Iranian capital market, emphasizing the moderating role of social media attention. Grounded in behavioral finance, specifically limited attention theory and information processing costs, the study addresses two questions: (1) whether more complex financial disclosures lead to weaker market reaction in the Tehran Stock Exchange (TSE), and (2) whether attention generated on Persian Twitter moderates this negative relationship. The study provides empirical evidence from an emerging market context, contributing to the literature on cognitive biases in financial decision-making and the informational role of social media.



Theoretical Framework and Hypothesis Development: The theoretical framework integrates Limited Attention Theory (Kahneman, 1973; Hirshleifer & Teoh, 2003) and Information Processing Cost Theory (Bloomfield, 2008). Investors face cognitive constraints, operating as selective information processors. Complex disclosures—characterized by length, numerical density, and ambiguous language—elevate processing costs, leading to incomplete or delayed price adjustments. This phenomenon is particularly pronounced in emerging markets like Iran, where retail investors with lower financial literacy constitute a significant portion of market participants (Moradi et al., 2021). Concurrently, the digital attention economy paradigm suggests social media platforms have become primary arenas for attracting investor attention. Platforms like Twitter facilitate collective discourse and cognitive facilitation, potentially mitigating the adverse effects of information complexity. Based on this synthesis, two hypotheses were developed: H1 posits a negative relationship between financial disclosure complexity and immediate market reaction (measured by cumulative abnormal returns and abnormal trading volume). H2 proposes that pre-disclosure social media attention positively moderates this relationship; the negative effect of complexity on market reaction is weaker for firms receiving higher levels of digital attention.



Methodology: The study employs a quantitative, event-study-based design with panel data spanning 2016–2023. The final sample comprises 1,024 firm-year observations from 128 non-financial companies listed on the TSE, selected through systematic screening. Disclosure complexity was measured using a multidimensional composite index, standardizing and averaging three proxies: (1) report length (logarithm of word count in explanatory notes), (2) numerical density (ratio of numerical digits to total words), and (3) degree of ambiguity (frequency of uncertain words such as "may," "probably," "risk"). Textual data were extracted from financial reports on the Codal database using Python libraries (PyPDF2, pdfplumber, BeautifulSoup) and processed with Hazm, a specialized Persian NLP library. Investor attention was quantified using data from Persian Twitter. Twitter was selected due to its textual nature, relatively open API, and prevalence as a forum for stock exchange discussions in Iran. Over 250,000 Persian tweets containing company-specific keywords (stock symbols, full names, abbreviations) were collected using snscrape and tweepy libraries. The attention metric (ATTN) was defined as the natural logarithm of the average daily count of unique, firm-specific posts during the five-day window preceding annual report releases. Control variables included firm size, book-to-market ratio, profitability (ROA), leverage, institutional ownership, Big Four auditor quality, and market return index. The analytical approach employed fixed-effects panel regression models with firm-clustered robust standard errors. The main model tested the interaction between COMP and ATTN, with robustness ensured through alternative variable constructions, different event windows, GMM estimation, and subsample analyses.



Key Findings: The empirical analysis provides strong support for both hypotheses. First, a statistically significant (p < 0.01) negative coefficient was found for the complexity variable (COMP). Economically, a one-standard-deviation increase in complexity leads to an approximately 1.4% reduction in short-window cumulative abnormal returns (CAR[0,+1]). This confirms that greater disclosure complexity dampens the market's immediate price adjustment, supporting limited attention and information processing cost theories. Second, the interaction term between COMP and ATTN was positive and statistically significant (p < 0.05). Marginal effect analysis revealed that the negative slope of complexity on returns flattens as social media attention increases. For firms in the highest attention quartile, the adverse effect of complexity becomes statistically indistinguishable from zero, demonstrating that high levels of digital attention can effectively neutralize the information processing barrier created by complex disclosures. Notably, the direct effect of social media attention alone on returns was insignificant, highlighting that its primary role is moderating rather than directly price-informative. Robustness checks using alternative windows, volume measures (CAV), different complexity specifications, and subsample analyses consistently reaffirmed the core results. Subsample analysis showed that the moderating effect of attention was stronger for firms with lower institutional ownership, where retail investors predominate.



Discussion and Implications: The findings offer substantial contributions to theory and practice. Theoretically, the study extends limited attention theory to the digital age within an emerging market context, demonstrating that social media attention acts as a critical moderating variable capable of mitigating market inefficiencies stemming from information complexity. It bridges the literature on formal financial reporting with informal information diffusion through digital networks. It introduces a theoretical distinction between "mere attention" and "quality information processing," evidenced by the insignificant direct effect of attention versus its significant interactive effect with complexity. Methodologically, the research pioneers the use of Persian social media data and NLP techniques in accounting and finance research. Practically, the findings carry important implications. For regulators like the Securities and Exchange Organization of Iran, the evidence underscores the need for policies promoting simplification and readability in mandatory disclosures, such as setting maximum limits for report length or minimum readability scores. Regulators could establish "attention monitor" systems to identify firms experiencing attention deficits during critical disclosure periods. For corporate managers, the results highlight the strategic importance of active investor relations in the digital sphere; proactive engagement on social media—publishing simplified management summaries or hosting online Q&A sessions—can ensure complex financial information is effectively communicated. For retail investors, the study serves as a caution about cognitive biases and suggests consulting credible informal channels when confronting complex reports. For auditors, the findings emphasize considering "understandability" as a practical objective during financial reporting consultations.



Limitations and Future Research Directions: The study acknowledges several limitations. First, data collection was limited to Persian Twitter; future studies could incorporate other platforms like Instagram and Telegram. Second, attention was measured quantitatively (post counts); future research could employ advanced NLP techniques to analyze content quality, sentiment, and user influence, distinguishing between "productive" and "superficial" attention. Third, the focus was solely on annual reports; future studies could examine quarterly reports, earnings announcements, or event-based disclosures. Fourth, despite advanced econometric methods, the observational data precludes definitive causal claims; mixed-method approaches could provide deeper insights. Finally, cross-country comparative studies could explore how institutional differences shape the relationship between disclosure complexity, attention, and market reactions.



Conclusion: This research establishes that the efficiency of the Iranian capital market in incorporating complex financial information is not determined by disclosure complexity alone but is fundamentally contingent upon the level of investor attention it garners in the digital ecosystem. It provides compelling evidence that social media activity can function as a societal corrective to cognitive limitations, enhancing price discovery. The study advocates for an integrated perspective in market regulation and corporate strategy that simultaneously addresses the quality of formal disclosures and the dynamics of informal digital communication channels.