Examining the relationship between the components of accruals and the cost of stock transactions in companies listed on the Tehran Stock Exchange

Academic Thesis for obtaining a Master's Degree, Field: Accounting

Abstract

Profit is one of the items that investors pay attention to and is considered the basis of many important economic decisions. Interest has two components: cash and accrual, on the other hand, accrual items have two normal and abnormal parts. Some evidences show the fact that investors face many problems in understanding information related to accruals, which leads to an increase in transaction costs, and the reason is information asymmetry among traders. This research examines the relationship between the components of accruals and transaction costs in companies listed on the Tehran Stock Exchange. In line with this goal, all the companies admitted to the Tehran Stock Exchange, which provided the required information in the years 2016 to 2018, were investigated. A total of 64 companies from different industries were selected. To check the data, panel analysis was used and multivariable regression was used to test the hypotheses, and their significance was determined using t and F statistics; Also, the Durbin-Watson statistic was used to test the lack of autocorrelation of the model. The result of the research shows that there is a significant and direct relationship between abnormal accruals and transaction costs; And also there is no significant relationship between normal accrual items and transaction cost.

Key words: accrual items, normal accrual items, abnormal accrual items, stock transaction cost

Chapter One

General Research

1-1 Introduction

    In developed countries, the stock exchange acts as a powerful tool to attract people's small and large capitals and direct them towards productive affairs. The stock market is a powerful place for this. From the point of view of people who invest in the stock market, it is very important to know the causes of stock price fluctuations, and also the most important factors that affect the stock price are the cash interest assigned to each share. The existence of organizations and research centers that can provide the necessary information for investors to make the right decisions will lead more people to the stock market to invest in securities. One of the most important actions in the field of investors is the optimal allocation of resources. On the other hand, investors are always looking for maximum return using the financial resources at their disposal. Since predicting stock returns is one of the most important issues for investors in the capital markets, figures that can help investors in this field are important. One of the most important features of joint stock companies is the separation of ownership from their management. Based on this, it is possible for managers to have exclusive access to a part of the information, as well as to prepare and provide information such as financial information. This feature, as well as the feature of accrual accounting, due to the existence of arrears (the difference between cash interest and accrued interest) and incentives such as reward incentives, profit smoothing, and evasion of regulations, creates the possibility and incentive for managers to manipulate information in order to meet their interests and in conflict with the interests of other groups, or in more complete terms, to engage in profit management. Accounting profit, which is prepared using the accrual system, is considered by many users of financial statements as a tool to measure the performance of companies. The purpose of measuring the performance of companies is the overall assessment of the financial situation and the results of operations, in order to make rational decisions. Jones, (1991) [1] defines the difference between profits and cash from operations as accruals and divides it into two parts, which in all research related to accruals, this division is accepted by researchers. A (Normal accruals) b) Abnormal accruals Normal accruals are due to regulations, organizations and other external factors. are limited, but the accruals can be applied by the management. The value of the company is based on the current value of its future cash flows.To predict future profits, it is better to analyze the components of profit (cash and accrual items), which the researcher examines the accrual component in this research. In line with the importance of accrual items in reducing problems hidden in cash flows, this article examines the relationship between the components of accrual items and the cost of stock transactions.

1-2 statement of the problem

Profit has two components, cash and accrual. Dividing profit into cash and accrual components significantly increases the predictability of profit. Accrual accounting is the basis of profit calculation and financial reporting. Iran's accounting standard number one, entitled "how to present financial statements", states that "with the exception of information related to cash flows, a business entity must prepare its financial statements on an accrual basis." (Rasaian and Hosseini, 1387).

Today, the profit figure is one of the items of interest to investors (as the main users of financial statements), and it is the basis of many important economic decisions. Forecasted profits are widely published. If the company's profit is less than the expected amount, this reduction can cause a sharp drop in the company's stock price. On the other hand, achieving a profit higher than the forecasted figure is considered good news. The high focus of users on profit has also increased and accrual accounting has been considered as an indicator of the quality of profit 2. When the accounting profit is greater than the incoming cash flows of the company, the surplus has been created through the creation of accrual items (Mehrani and Behbaniya, 2019). It is not considered relevant, because the identified cash has "timing" and "matching" problems that can lead to incorrect measurement of the company's performance. In this case, accepted accounting principles suggest the use of accruals to reduce these problems, to correct timing and matching problems (Rasaian and Hosseini, 2017).

One of the characteristics of efficient markets [2] and the non-ideality of transaction costs [3] Liquidity is high. Transaction costs include a wide range of costs in the form of obvious costs, such as tax and brokerage, and non-obvious costs due to information inefficiency. Studies show that the cost of transactions in the American markets has been economically important, and with the increase in liquidity, the cost of transactions will decrease significantly, so examining the role of a factor called accruals is very important in this regard (Moradzadeh Fard et al., 2019). Some evidences prove the fact that investors face many problems in understanding the information related to accruals, which itself leads to an increase in stock trading costs, and the reason for this increase is the asymmetry of information between knowledgeable and uninformed traders.

Managers may use reckless profit management for personal benefits in many situations. Reckless earnings management indicates poor quality of accounting information. In this case, a part of the informed traders start exchanging shares, while the desire of uninformed traders to exchange the company's shares has been greatly reduced. Traders have recognized the costs of wrong choices caused by profit management, and such costs have been clearly seen in the accounting scandals of companies. The main results of the research indicate that the reduction of information asymmetry will reduce the cost of transactions and the risk of wrong choices. Clear and high-quality information flow reduces information asymmetry. The increase in information asymmetry between managers and shareholders of the company is directly related to the decrease in the number of investors, the decrease in the volume of transactions and, in general, the decrease in social benefits from these transactions. The information asymmetry caused by the low disclosure quality will lead to the wrong choice problem. Securities faced with this problem face higher transaction costs at the time of buying and selling. Therefore, buyers are less willing to buy them (Sataish et al., 2013).

The role of accounting information in reducing information asymmetry in the stock exchange was examined. The results show that information asymmetry existed between investors in the Tehran Stock Exchange, and this is much more in the periods before the announcement of the profit than in the periods after the announcement of the profit.