Investigating the effects of profit smoothing on the added economic value of companies admitted to the Tehran Stock Exchange

Dissertation for Master's degree

Orientation: Accounting

Abstract:

We have started this research with the basic question that adjustments in accounting profit such as profit smoothing will have an effect on new performance evaluation indicators such as economic added value or not? For this purpose, we have investigated this issue under the title "Investigation of the effects of profit smoothing on the added economic value of companies admitted to the Tehran Stock Exchange". Therefore, the variables of this research have been profit smoothing companies and added economic value. The statistical population of this research is the companies accepted in the Tehran Stock Exchange and sampling has been randomly selected based on the desired significance level. The time period of this research was a three-year period between 2016 and the end of the financial period of 2018. In order to answer the main question of the research, we have developed the following main and sub-hypotheses:

Smoothing of profit has an effect on the criterion of added economic value of companies admitted to the Tehran Stock Exchange. And the economic added value of paving companies is significantly lower than the economic added value of non-paving companies. After the statistical analysis and the use of the two-way mean comparison test at a significance level of 95%, the hypothesis of this research was confirmed.

Introduction:

For different reasons, different groups pay special attention to the issue of evaluating the performance of companies and consider them important, including owners, management, government investors, banks, and creditors. And also there are different criteria for performance evaluation, each of which can be suitable criteria for performance evaluation in its place. The information required for these criteria is obtained through financial statements (accounting), economy, free market or a combination of them, each of which has different advantages and disadvantages.

Since the traditional performance evaluation criteria such as ROA, ROI, EPS, etc. All of them rely on the accounting profit, and at the same time, the net profit itself has many uncertainties, including the possibility of smoothing the profit by the company's management in order to get more rewards, the use of estimates and estimates in the calculation of the accounting profit, such as estimating the cost of doubtful receivables and so on. And another disadvantage is allowing optional use to the management to use accepted accounting methods. Therefore, it is expected that the manipulation of the accounting profit or the smoothing of the profit will have an effect on the traditional performance evaluation criteria. 

On the other hand, in the new performance evaluation criteria such as economic added value [1], to some extent, the defects related to accounting profit have been removed and the defects have been compensated. For example, in the calculation of economic added value, the net profit at the end of the profit and loss statement is no longer used, but the operating net profit after tax deduction [2] is used to solve some issues by itself. Now this issue is raised whether it can be empirically investigated that adjustments in accounting profit such as profit smoothing will have an effect on new indicators of performance evaluation such as economic added value or not? For this purpose, we will investigate this issue under the title "Effects of profit smoothing on economic added value of companies admitted to Tehran Stock Exchange". Therefore, the variables of this research will be profit smoothing companies and added economic value.

Chapter One

General Research

1-1) Introduction

In this chapter, the concepts and generalities of research, including; The statement of the problem, goals, importance, analytical model, theoretical framework, assumptions, time period, territories and finally the definition of key words of the research.

2-1) Study history

In an article entitled "Effect of profit smoothing on the returns of companies admitted to the Tehran Stock Exchange", it comes to the conclusion that profit smoothing has no effect on the abnormal returns of companies, but the existence of profit smoothing in Tehran Stock Exchange approves. Also, in the research done by Moradi, Pourheidari, Meshaikhi et al.have done, they have confirmed the existence of profit smoothing in Tehran Stock Exchange.

In 2010, a research was conducted under the title of information application of economic added value in the evaluation of financial performance, according to the results of the statistical analysis of the collected information, we found that only operating profit (OI) has an information load in the field of explaining changes in stock returns, and economic added value does not have an information load in this field. (Jalili, Mohammad, Master's Thesis - Imam Sadegh University).

In 2002, a research was conducted under the title of examining the function of economic added value in predicting the future profits of companies. The final result of the research shows that if the economic added value is used correctly and the appropriate forecasting model is determined, profit changes can be predicted, and in this sense, accounting knowledge has taken an important step in achieving the goal of providing useful information (Maeini, 2018, 56). The results of the hypothesis test show that the accounting profit as the most important accounting variable in financial and investment decisions is of interest to the decision makers in the spring bond market and in most cases it has more informative content than others. Economic added value and cash added value have also been able to potentially enter into the decision-making models in this market and sometimes show more informative content than others. However, according to the results of this research, cash from operations has not been able to show a significant relationship with stock returns (24, 2013, Mashayikhi).

In 2013, a study was conducted to investigate the relationship between added economic value, cash from operating activities, and profit before interest and taxes with the market value of the companies' shares in companies listed on the Tehran Bahardar Stock Exchange. The results of the research show that at the 95% confidence level, it can be claimed that the profit before interest and tax shows a greater correlation with the market value than the added economic value. Meanwhile, economic added value has a lower correlation with market value than operating cash flows (Saraji, 2013, 24) 2.

In 2014, a research was carried out under the title of investigating the relationship between economic added value and profitability indicators in the companies of the motor vehicle group admitted to the Tehran Stock Exchange between 1378 and 1382, and after testing the research hypotheses, it came to the conclusion that between three variables There is a significant relationship between PM, ROA, and EPS with economic value added, and there is no significant relationship between MV, ROE, and P/E variables. (Shakri, Ahmad, Master's Thesis - Higher Institute of Management and Planning Education)

In 2014, a research was conducted under the title of examining the correlation between efficiency ratios and added economic value in the food industry sector of companies admitted to the Tehran Stock Exchange. The results of the research after testing the hypotheses indicate that there is no significant relationship between efficiency ratios and economic added value (Haraf Amuqin, 2014, 31) 3. 3-1) Statement of the problem Different groups for different reasons pay special attention to the issue of evaluating the performance of companies and consider them important, including owners, management, government investors, banks and creditors and . And also there are different criteria for performance evaluation, each of which can be suitable criteria for performance evaluation in its place. The information required for these criteria is obtained through financial statements (accounting), economy, free market or a combination of them, each of which has different advantages and disadvantages.

Since the traditional performance evaluation criteria such as ROA, ROI, EPS, etc. All of them rely on the accounting profit, and at the same time, the net profit itself has many uncertainties, including the possibility of smoothing the profit by the company's management in order to get more rewards, the use of estimates and estimates in the calculation of the accounting profit, such as estimating the cost of doubtful receivables and so on. And another disadvantage is allowing optional use to the management to use accepted accounting methods. Therefore, it is expected that the manipulation of the accounting profit or the smoothing of the profit will have an effect on the traditional performance evaluation criteria.