Investigation the effect of accounting earnings components on the future earnings prediction and the value of listed companies in Tehran Stock Exchange

Author Name(s): Vahid hatamiyan , Adel shahvalizadeh*
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Abstract

Accounting earnings and its related components are among information that is intended to the users of financial statements and they use it in their decisions as an important component and a measurement criterion of many of their expectations. The information related to the earnings components help in prediction of future earnings and is effective on valuing firms. According to the importance of earnings and its components’ information containing, the aim of this study is to investigate the effect of accounting earnings on future earnings prediction and enterprise values of listed companies in Tehran Stock Exchange that in this regard, the statistical population of the research are the companies listed in Tehran Stock Exchange and the sample of this research consists of 150 companies member of the Exchange and duration of this research is a 6 years period from 2009 to 2014 and mutually the number of observation is 900. To achieve the objectives of the study and answer research questions, research hypotheses including 6 ones in the two main and subsidiary categories were developed and tested. Also, the results show that the accounting earnings components (accruals and cashes) have significant impact on future earnings prediction and the accounting earnings can be used to predict the future earnings and valuing firms.

KeyWords

Accounting earnings, accruals, operating cash flow, future earnings prediction, Enterprise value

Introduction

The main objective of companies and economic units is to make earnings and create value for shareholders; also due to advances in technology and expansion large manufacturing and commercial corporations at the international level and increasing prosperity of stock and exchange markets, an important criterions of performance evaluation of different commercial units’ management as well as the assessment of enterprise value is analyzing of the company’s reported accounting earnings figures, profitability potential and companies’ stock values. Investors, stockholders and trustees’ try to act in decisions in

a way to have right prospect from the process of firms’ profits so that they gain their expectation of investment and achieve their specific objectives with taking right and more objective decisions. Meanwhile, prediction of stock profits is an important subject in various fields of decision theory. This prediction helps the stakeholders to improve their decision-making processes and decrease the risk of their decisions. They are interested to estimate their investing’s future profits and judge about receiving their future stock dividends. Thus, investors request prediction of earnings and especially request prediction of the earnings of earnings per share. These predictions helps a current shareholders decide to sell or hold his or her shares. An investor before action decide to purchase a stock or decide to invest elsewhere by predicting future cash flow distribution. So outlook in the method of stock profits paying in future and their estimate of enterprise value is the first priority in decisions of investment (Mahdavi and Saberi, 2010).

Conclusion

First main hypothesis

The first main hypothesis explains that the accounting earnings components have meaningful effect on future earnings prediction of the companies listed in Tehran Stock Exchange. The main purpose of financial bills is providing useful financial data for users. These data are to some extend based on the economic facts. Thus, the provided information can help to improve the investors, analyzers and even managers’ decisions. The result of this study is similar to the previous findings such as wand (2014) and Bassam (2002).

 

Second main hypothesis

The second main hypothesis of this research explains that the accounting earnings components have meaningful effect on enterprise values of the companies listed in Tehran Stock Exchange. The results of this research is in line with the results of Wang (2014), Aba Ibrahim et al[1] (2009) and Kumar and Krishnan[2] (2008).

 

Subsidiary hypothesis 1-1

This hypothesis explains that cash items (cash flows) have meaningful effect on future earnings prediction listed in Tehran Stock Exchange. In the year after prediction of cash flows, investors have invested in companies which their provided to be true cash flow has been more than the expected cash flow and this means that the investors has responded the right response to the cash flow predictions. This result is similar to the similar researches such as Arthur et al (2010).

 

Subsidiary hypothesis 1-2

This hypothesis explains that accruals have meaningful effect on future earnings prediction listed in Tehran Stock Exchange. Investors generally did not show a suitable response to the accruals predictions not in the prediction year and not in the years after that. This can have different and contradictory reasons. For example it is possible that investors be completely familiar with accruals and with the information of the possibility of their manipulating by managers consider them without any information contents. This result is the same of the researches by Wang (2014), Xu (2010) and Gong et al[3] (2009).

 

Subsidiary hypothesis 2-1

This hypothesis explains that cash components (cash flow) have meaningful effect on enterprise values listed in Tehran Stock Exchange. The result of this research is similar to the results of other researches such as Habib[4] (2011), Aba Ibrahim et al[5] (2009) and Kumar and Krishnan[6] (2008).

Subsidiary hypothesis 2-2

This hypothesis explains that accruals have meaningful effect on enterprise values listed in Tehran Stock Exchange. The obtained result can be seen in similar researches such as Habib (2011), Aba Ibrahim et al (2009) and Kumar and Krishnan (2008).

 

Recommendation regarding the research’s results

According to the results and findings of this research the following recommendation for the users of this research can be titled as follows: 1) to better study the financial bills an especial attention should be done to the earnings and losses of the companies always especially to the existing accounting earnings digits in it and in fact this digit is the measure criterion of many expected patterns of all the users of financial bills, 2) in this research showed accounting earnings components that is composed of accruals and cash components are effective in prediction. So, certainly attention to these two components is very important and necessary and analyzing these two items is important.

 

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