Investigating the relationship between business strategy and profit quality in companies listed on the Tehran Stock Exchange

Abstract

The main purpose of the research is to examine the relationship between business strategy and profit quality in companies admitted to the Tehran Stock Exchange. The statistical sample of the research includes 145 companies admitted to the May Stock Exchange, whose data was collected and analyzed for a period of 5 years (1387 to 1391).

In this research, the correlation method was used to test the hypotheses. The statistical analysis of the data was done at the 95% confidence level, and the hypotheses were tested using the statistical method of panel data and the linear regression model. The research results show that resistance companies tend to adopt conservatism and profit management more than exploration companies. Also, macro environments Economic changes the relationship between business strategy and profit quality at the level of profit management index. While macroeconomic environments do not significantly affect the relationship between business strategy and profit quality at the level of conservatism index. Key words: conservatism, profit management, exploratory strategy, resistance strategy.

1-1) Introduction

In recent years, the concept of strategy has received significant attention in organizational literature and by financial researchers. In theoretical evidence, strategy is defined as the organization's will and planning to achieve long-term organizational goals and forecasting the necessary resources to achieve these goals. The strategy of profit-making units may have different consequences for them. Therefore, choosing a strategy requires analyzing the company's current information and thinking about its results.

One of the results of adopting different strategies in companies is its effects on their financial reporting behaviors, which may be of great concern to managers and owners. Because today, information is considered an important strategic tool in decision-making, and without a doubt, the quality of decisions depends on the correctness, accuracy, and timeliness of the information that is provided to people at the time of decision-making. In the financial markets, this information can be reflected in the form of various signs, symptoms, news and forecasts from inside or outside the company and become available to shareholders, causing reactions and as a result changes in stock prices (Nuralhaq et al.[1], 2013). 

Conservatism as one of the limiting principles of accounting has been used by accountants for years and despite many criticisms of it, It has always maintained its position among other accounting principles. so that‌ The durability and survival of conservatism in the face of criticism over many years can be seen as a proof of the fundamental principles of this principle. Also, conservatism can be mentioned as a mechanism that, if applied correctly, will lead to the solution of many problems of representation and information asymmetry, which generally results from the ever-increasing gap between managers and suppliers of financial resources of business units. Considering the importance of the role of conservatism, the need for criteria to accurately measure it in financial reporting seems necessary.

The aim of this research is to investigate the relationship between business strategy and profit quality of companies admitted to the Tehran Stock Exchange. As an overview of the research, this chapter gives a general look at the research and familiarizes the reader with what is going to be analyzed. Based on this, in the current chapter, the main problem and the necessity of conducting the research are first explained. Then the research assumptions and generalities of the studied statistical population and the intended methods for data analysis are explained. At the end of the chapter, variables and key words are presented and defined operationally.

1-2) Statement of the main research problem

According to many financial experts, the most important tasks of management in the financial field are to decide on four main issues; Investment decisions (capital budgeting), financing decisions, dividend distribution decisions in joint stock companies and decisions related to working capital. These decisions are interdependent and must be made in order to maximize the value of the company for the shareholders.

The concept of strategy in the organizational literature was developed in the 1950s by researchers at the Harvard School of Economics (Snow and Hambrick [2], 1980). According to Chandler's definition, strategy means "determining long-term investment goals and using the necessary resources to implement these goals." . Mintzberg [3] (1987) argues that an organizational strategy refers to a plan, pattern, position and vision of a company or industry. In this study, we will focus on the implementation of business strategy using the scientific indicators proposed by Snow and Hambrick. Esno and Hambrick (1980) have emphasized that Mills and Esno's research [4] (1978) has completely described the strategic orientation of an organization.

Mills and Esno (1978), with studies in the field of industrial organizations, using two criteria of "market dynamics" and "orientation of competitors" which are presented in the article of Emery and Trieste (1965), divided the environments into four categories and suggested a specific strategy for each of these environments. These strategies were defensive, exploratory, reactive and analytical. These strategies show that the organization, in any environmental situation; how to choose one's territory, how to organize technologies, and how to innovate.

Mills and Snow (1978) have also emphasized that exploratory and resistance strategies have the greatest effect. We will classify resistance.

Mills and Snow (1978) and Hambrick (1983) emphasize that exploratory companies have a stronger commitment to product development, innovation and product change. These companies are present in relatively unpredictable business environments and try to discover new opportunities through continuous market research. exploratory companies promote productivity in the guro of innovation. These companies thrive in environments that change slowly. In contrast to resistance companies, they emphasize performance efficiency and a low level of product development and market defense (Mills and Snow 1978). Hambrick (1983) explains that resistant companies have a greater tendency to compete in price, delivery, or work quality; Capital-resistant companies make a huge investment in the engineering process and have a mechanical structure and are influenced by production management and accounting.

In order to examine the relationship between business strategy and profit quality, we refer to the following 3 theories:

Theory Representation (Jensen and Meckling[5], 1976), political cost theory (Watz and Zimmerman[6], 1978), transaction cost theory (Kais[7], 1976).

According to Jensen and Meckling (1976), an agency relationship based on which one or more owners appoint another person as a representative or agent on their behalf and delegate decision-making to him they do, it has costs such as the costs of owners monitoring the representative's performance, commitment costs and residual losses.

Jensen and Meckling (1976) believe that managers prioritize their own interests in making decisions. so that if the interests of the managers and owners of the company are aligned; The managers' decisions will be in line with the interests of the company, and if the interests of the managers and owners of the company are not aligned; Managers' decisions will be in line with their personal interests. According to the belief of Jensen and Meckling, it can be argued that managers take steps in the direction of their own interests by manipulating the accounting profit (profit management) in making strategic decisions of the company. Also, both political cost theory (Watts and Zimmerman 1978) and transaction cost (Kais, 1937) refer to managers' motivations to use profit-seeking accounting methods (Nuralhaq et al., 2013). According to political cost theory, Watts and Zimmerman [8] (1978) argue that in managerial decision making (Including accounting decisions) Managers must examine the macro regulatory environment. It follows that accounting financial statements are made available to the public to aid decisions, and influence their decisions.