The Effect of Accounting Comparability and Consistency on the pricing efficiency of discretionary accruals

Document Type : Original Article

Authors

1 Phd Student, Department of Accounting, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran

2 Professor of Accounting , Department of Accounting, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran

3 Assistant Professor, Department of Economy, Isfahan University, Isfahan, Iran

Abstract

Managers can communicate accounting information to the capital market through discretionary accruals. Increasing the comparability and consistency of accounting allows managers to estimate discretionary accruals more accurately, and this can lead to pricing efficiency in the capital market. The purpose of this study is to investigate the effect of comparability and consistency on the pricing of discretionary accruals. The statistical population of the study includes all companies listed on the Tehran Stock Exchange. In order to achieve the objectives of the research, 107 companies were selected from the companies listed on the Tehran Stock Exchange from 2009 to 2020 as the statistical sample. Accounting consistency has been measured by employing the text mining and vector space model. In order to analyze the data and test the hypotheses, the Mishkin simultaneous equations model was used. The results show that when prior-period comparability (or consistency) is higher, current period discretionary accruals are less positively correlated with contemporaneous returns and less negatively correlated with future returns, consistent with our prediction that comparability (or consistency) improves the pricing efficiency of accruals.

Keywords

References

1) AliaAhmadi, S., & Fadaei, z. (2015). Assessing the role of information environment and company growth on pricing of accruals in companies listed on the Tehran Stock Exchange. Journal of Financial Accounting Research, 3(25), 91-104.
2) Adut, D., Holder, A., & Robin, A. (2013). Predictive Versus Opportunistic Earnings Management, Executive Compensation, and Firm Performance. Journal Accounting Public Policy, 32, 126-146.
3) Artikis, P.G., & Papanastasopoulos, G.A. (2016). Implications of the cash component of earnings for earnings persistence and stock returns, The British Accounting Review, doi: 10.1016/j.bar.2016.02.002.
4) Ball, R. (2013). Accounting informs investors and earnings management is rife: Two questionable beliefs. Accounting Horizons, 27(4), 847–853.
5) Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research, 6, 159-178.
6) Chen, A., & Gong, J.J. (2019). Accounting comparability, financial reporting quality, and the pricing of Accruals. Journal of Advances in Accounting, 30, 1-16
7) Choi, J.H., Choi, S., Myers, L & Ziebart, D. (2017). Financial statement comparability and the in formativeness of Stock Prices about future earnings, www.ssrn.com.
8) Dastgir, M., Heidari, S., & Turki, L. (2014). Investigating the persistence of the cash component in relation to the accrual component of profit and the role of company characteristics on the anomaly of accruals in the base metals industry. Journal of Financial Accounting Research, 4(22), 1-22.
9) Dechow, P. (1994). Accounting Earnings and Cash Flows as Measures of Firm Performance: Th Role of Accounting Accruals. Journal of Accounting and Economics,17, 3-42.
10) Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1996). Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by SEC. Contemporary Accounting Research,13(1), 1-36.
11) Engelberg, J., Ozoguz, A., & Wang, S. (2016). Know thy neighbor_ industry cluster, information spillover and market efficiency. Journal of Financial and Quantitative Analysis. (forthcoming), 21(3), 326-359.
12) Financial Accounting Standards Board (FASB) (1980). Qualitative Characteristics of Accounting Information. Norwalk, CT: Statement of Financial Accounting Concepts No. 2 Available at http://www.fasb.org/pdf/con2.pdf.
13) Financial Accounting Standards Board (FASB) (2010). Statement of financial accounting concepts no. 8. Conceptual framework for financial reporting.
14) Foroughi, D., & Ghasemzad, P. (2015). The effect of financial statement comparability on stock price synchronicity. Journal of Financial Accounting Research, 27(1), 39-54.
15) Foroughi, D., Amiri, H., & Ebrahimian, A. (2017). Profit persistence and its components at the industry and company level. Accounting Advances, 9(2), 63-92.
16) Gong, G., Li, L. Y., & Zhou, L. (2013). Earnings non-synchronicity and voluntary disclosure. Contemporary Accounting Research, 30(4), 1560–1589.
17) Habib, A., Hasan, M. M., & Al-Hadi, A. (2017). Financial statement comparability and corporate
212 / The Effect of Accounting Comparability and Consistency on the pricing efficiency of …
Vol.9 / No.34 / Summer 2024
cash holdings. Journal of Contemporary Accounting & Economics, 13(3), 304-321.
18) Hajiha, Z., & Chenari-Buket, H. (2018). Financial Statement Comparability and Expected Crash Risk. Financial Knowledge of Securities Analysis,11(39), 37-48.
19) Hashemidahchi, M., Izadinia, N., & Amiri, H. (2020). The effect of financial statement comparability on the relevance of accounting information with emphasis on the role of specialized investors and information asymmetry. Accounting and Auditing Review, 27 (3), 473-494.
20) Jiraporn, P., Miller, G. A., Yoon, S. S., & Kim, Y. S. (2008). Is Earnings Management Opportunistic or Beneficial? An Agency Theory Perspective. International Review of Financial Analysis, 17, 622-634.
21) Kia, A., & Safari Graili, M. (2017). Financial statement comparability, accrual earnings management and real earnings management. Journal of Financial Accounting Knowledge, 4(2), 115-137.
22) Kim, S., Kraft, P., & Ryan, S. (2013). Financial statement comparability and credit risk. Review of Accounting Studies, 18, 783–823
23) Kothari, S. P., & Verdi, R.S. (2011). The benefits of financial statement comparability. Journal of Accounting Research, 49(4), 895–931.
24) Lewis, C. (2012). “Risk Modeling at the SEC: The accounting quality model.” speech before financial executives international committee on finance and information technology. https://www.sec.gov/news/speech/2012-spch121312cmlhtm
25) Louis, H., & Robinson, D. (2005). Do Managers Credibly Use Accruals to Signal Private Information? Evidence from the Pricing of Discretionary Accruals Around Stock Splits. Journal of Accounting and Economic, Vol. 39, Pp. 361˚ 380 .
26) Matonti, G., Tommasetti, A., & Tucker, J. (2014). Do Italian non Listed Firms Manage Earnings Efficiency or Opportunistically? GV - Proceedings in GV- Global Virtual Conference.
27) Mehrabanpour, M. R., Faraji, O., & Sajadpour, R. (2020). The mediating role of financial reporting quality in the relation between comparability of financial statements and cash holdings. Accounting and Auditing Review, 27(1), 132-153.
28) Mehrvarz, F., & Marfou, M. (2016). The relation between the financial statement comparability and price informativeness about future earnings. Empirical Studies in Financial Accounting, 49(1), 89-110.
29) Mishkin, F. (1983). A rational expectations approach to macroeconometrics: Testing policy effectiveness and efficient-market models. Chicago, IL: University of Chicago Press.
30) Peterson,K.,R.Schmardebeck., & Wilks, T.J. (2015).The Earning Quality and Information Processing Effects of Accounting Consistency .The Accounting Review, 90(6), 2483- 2514
31) Perotti, P., & Wagenhofer, A. (2014). Earnings quality measures and excess returns. Journal of Business Finance & Accounting, 41(5), 545–571.
32) Rahimi Dastjerdi, M., Khodamipour, A., & Bahar Moghadam, M. (2016). Investigating the pricing of normal and abnormal items of cash and accrued components of profit. Financial Accounting Quarterly, 3(31), 133-161.
33) Rezaei, F., & Veisi-Hesar, S. (2019). Evaluating the Persistence and Pricing of Earnings, Accruals, and Operating Cash Flows in Companies. Journal of Financial Accounting Knowledge, 6(1), 187-210.
34) Robert, K., Sangwan, K., & Prianka, M.(2018). When Does Comparability Better Enhance Relevance ? Policy Implications from Empirical Evidence. Journal of Accounting and Public policy, 37(5), 436-457.
35) Robin, A., & Wu, Q. (2015). Firm Growth and the Pricing of Discretionary Accruals. Review of Quantitative Finance and Accounting, 45(3),1-30.
36) Siregar, S. V., & Utama, S. (2008). Type of Earnings Management and the Effect of Ownership Structure, Firm Size, and Corporate-Governance Practices: Evidence from Indonesia. The International Journal of Accounting, 43(1), 1-27.
37) Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289–315.
38) Sohn, B. C. (2016). The effect of accounting comparability on the accrual-based and real earnings management. Journal of Accounting
International Journal of Finance and Managerial Accounting / 213
Vol.9 / No.34 / Summer 2024
39) Subramanyam, K. (1996). The pricing of discretionary accruals. Journal of Accounting and Economics, 22(1–3), 249–281.
40) Torabi, I., Dastgir, M., & Kiani, GH.H. (2020). The Moderating Effect of Information Asymmetry and Imperfect Market on the Impact Severity of Comparability and Accounting Consistency on the Cost of Equity Capital in Listed Companies in Tehran Stock Exchange. Journal of Financial Accounting Research, 2(44), 1-22.
41) Watts, R., & Zimmerman, J. (1986). Positive accounting theory. Englewood Cliffs, NJ: Prentice Hall.
42) Xie, H. (2001). The mispricing of abnormal accruals. The Accounting Review, 76(3), 357–373.
43) Zafari, S., Foroughi, D., & Kiani,GH.H. (2019). The effect of comparability and consistency on profit quality: a text mining approach. Empirical Studies in Financial Accounting,16(64), 1-30.

Files

Share

How to cite

Statistics