Review of the Relationship between the Relevance Value of Accounting Information and Profit Management and Corporate Governance in Companies Listed in Tehran’s Stock Exchang

Author Name(s): Darab Rahmati, Karim Nemati
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Abstract

This study aims to investigate the relationship between the relevance value of the accounting information and profit management and corporate governance in companies listed in Tehran’s stock exchange. This study is an applied – correlational research. Data collection has been done by using information reported in the financial statements of the companies listed in Tehran’s stock exchange. In the respect of meeting the goals of the study, five hypotheses have been developed. The statistical sample of the research includes 114 companies during the five-year time interval from 2010 to 2014. In order to analyze the data, Excel and Eviews 7 software has been used. In order to measure the hypotheses, regression test, Durbin-Watson test and Hausman and Limer test have been used and the results obtained from this study showed that there is a significant relationship between the value of the relevance of the accounting information and profit management in companies listed in Tehran’s stock exchange. And there is a significant relationship between the value of the relevance of the corporate governance and profit management in companies listed in Tehran’s stock exchange.

Introduction

The accepted standards of accounting in various countries allows the managers to have a wide range of authorizations in selecting various methods of accounting in order to calculate the profit. Of course the managers might not use all of these authorizations for meeting the company’s goals. Accruals are controlled more by the management than items in cash composing the profit. In fact, management of a business firm can manage the firm’s profit for their own purposes by using these permitted flexible methods (Samaee and ShariatPanahi, 2004: 58). The purpose of the management is to present a dynamic and stable company in terms of investors and capital market. Because most investors and managers believe that companies with a suitable profitability process and their profit does not go through major changes have more value and the capability to predict and compare them in comparison with similar companies (Noroosh, Sepasi and Nikbakht, 2005: 41).

Investors and other users can use the company’s profits for investment-related decisions and to predict the cash flows of the future profits accurately and confirm or reject their previous expectations when company’s profits are reported based on the true financial performance of the company and not based on applying the opinion of the management in using accounting methods. Therefore, a strong motivation of managers for altering profit and showing a desirable image of the company might lead to untrue stock prices, irrelevance of accounting information and ultimately investors making wrong decisions (Habib, 2004: 6).

Accounting scandals and the fall of companies in America such as Anron and Veldcam and in Australia such as Tel One companies have caused serious concerns about profit management, using the reported profit and moral issues of those of prepare and audit these reports. Legislator organizations in America, based on laws such as the Sarbanes-Oxley law have made the companies’ managers guarantee the financial reports, enable corporate governance and improving the auditor’s independence through which profit management would be reduced and the quality of financial reporting would be improved (HasasYeganeh, 2006: 32).

In fact, the separation of shareholding and management’s control over the company’s operation can lead to the conflict of benefits and creation of the representation costs caused by this conflict of benefits between managers and shareholders. Without the issue of representation, quality of reporting won’t have any specific problem because managers do not have any kind of motivation for altering the financial reports or hiding information. Corporate governance is one of the mechanisms for reducing the issue of representation. Corporate governance mechanisms can reduce the profit management opportunities and therefore increase the quality of profit.

Therefore, the main issue of this study is to answer this question: what kind of effect relevance value of accounting information and profit management and corporate governance in the companies listed in Tehran’s stock exchange can have?

Conclusion

The results obtained from the first hypothesis show that there is a significant relationship between operational cash flows and external financing of the companies listed in Tehran’s stock exchange. the probability of the t-value associated with the variable operational cash flows is equal to 0.000, which is lower than 0.05 and its coefficient is equal to -0.304; therefore, it can be said that there is a negative significant relationship between operational cash flows and external financing of the companies listed in Tehran’s stock exchange; in such a way that by increasing operational cash flows, the external financing in the companies listed in Tehran’s stock exchange is reduced and therefore, in such companies, often the cash flow created inside the company is selected as the first financing solution and liability and share issue are respectively the next priorities of financing. Accordingly, profitable companies which often have good cash flows tend to borrowing less. Therefore, companies with proper operational cash flow is used less than external financing. The results of this research complies with the researcher of Fazari, et al. (1988), Myers (1984), Garcia and Sogrob (2014) and they do not comply with the researches of George, et al. (2010) and Bagherzadeh (2003).

Results obtained from testing the second hypothesis showed that limitation of financing significantly affects the relationship between operational cash flows and external financing of the companies accepted in Tehran’s stock exchange. The probability of the t-value associated with the variable operational cash flows is equal to 0.000, which is lower than 0.05 and its coefficient is equal to 0.179 and positive; therefore, it can be said that there is a negative significant relationship between operational cash flows and external financing of the companies listed in Tehran’s stock exchange; in such a way that by increasing operational cash flows, the external financing in the companies listed in Tehran’s stock exchange is reduced and therefore, on the companies facing financial limitation the costs of improper selection and issuance are imposed; whereas, companies without financial limitation often only face costs of issuance. Therefore, it is expected that sensitivity of the outsourcing financing sources to cash flow is different in companies without financial limitation from companies with financial limitation. Companies with severe financial limitation put more emphasis on cash flows at the time of making decisions regarding investment. In other words, by increasing the difference between costs of internal and external financing costs, the investment’s sensitivity to internal cash flow is also increased. The results of this study comply with that of Kashanipoor, et al. (2010), Zargar (2013), Garcia and Sogorb (2014), Almida and Kampelo (2001), Kim (2011) and they don’t comply with that of Dicha, et al. (2012).

 

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