Investigating the relationship between stock liquidity and real profit management in companies listed on the stock exchange

Dissertation for Master's degree (M.Sc)

Major: Accounting

Abstract

The main purpose of this research is to examine the relationship between stock liquidity and real profit management of companies listed on the Tehran Stock Exchange. The statistical population of the present research is the companies admitted to the Tehran Stock Exchange during the years 1382 to 1391, and the sample size is 96 companies according to the screening method and after removing outlier observations. In this research, stock liquidity is considered as an independent variable to investigate its effect on real profit management and its components (real profit management through sales manipulation, real profit management through discretionary spending, and real profit management through abnormal production levels). In this research, which uses panel data with fixed and random effects, the results of analyzing the companies' data using multivariate regression show a 95% confidence level. shows that there is a significant negative (inverse) relationship between stock liquidity and real profit management, real profit management through sales manipulation and real profit management through discretionary spending. Also, these results indicate the absence of a significant relationship between stock liquidity and real profit management through abnormal production level.

Key words: stock liquidity, real profit management, sales manipulation, discretionary spending, abnormal production level

Introduction

Profit management is the result of the degree of flexibility and discretion that managers have in their financial reporting. Managers may use this power to opportunistically manage profits or convey confidential information about the company's future performance. Most researchers have found that profit management is done with the motive of misleading users of financial statements or deviating from contractual results that depend on accounting profitability (Aghaei and Chalaki, 2018).

In order to achieve the desired level of profit, managers can wait until the end of the year and use optional accrual items to manage the reported profit, but this strategy may entail the risk that the amount of profit that is considered to be manipulated is more than the available discretionary accrual items; Because discretionary accruals are limited by generally accepted accounting principles (Barton and Simcoe[1], 2002). It is assumed that the fundamental economic events of a company limit the ability of managers to report deferred (committed) profits. As a result, there is a possibility that managers cannot achieve their desired profit through optional accruals at the end of the year. Managers can reduce this risk by manipulating actual operational activities throughout the year (Etamidi et al., 2019). Manipulation of real activities is less subject to restrictions. Another advantage of substituting real activities for profit manipulation is that auditors and regulators pay less attention to such behavior. However, the manipulation of real activities is not cost-free, because there is a possibility that cash flows in future periods will be indirectly (negatively) affected by the actions that are currently being taken to increase profits (Nazimi Ardakani, 2018). Therefore, in the rest of this chapter, the overall design of the research including hypotheses, research objectives, variables and their operational definition and the statistical methods used to test the hypotheses will be explained. Past research (Gani, 2005) classifies these operational decisions into 4 groups:

Reduce discretionary research and development costs

Reduce discretionary advertising and sales

Cash loss on sale of fixed assets to report

Additional production to reduce cost of goods sold and increase credit sales, not to do

Some Research and development activities that lead to positive net present value projects in the future. Not doing advertising to increase the company's sales. Sale of operational fixed assets that help to increase the productivity and efficiency of business unit operations.Blocking the company's capital in the form of inventories, increasing credit sales, which leads to a decrease in cash flows to the company. All of them indicate that the above four actions will lead to a decrease in the company's future operating cash flows and as a result, a decrease in the company's future tax performance. Therefore, it is expected that there is a negative relationship between the actual earnings management (which is generalized in the form of the above four activities) and the company's future operating performance.

Many of the existing evidences about the manipulation of the actual activities focus on the opportunistic reduction of discretionary expenses, including research and development expenses (for example, research Bush (1988) and colleagues (1991). Although the reduction of discretionary costs can increase the risk of future operating cash flows (CFO), it should be noted that this action has a positive effect on the current operating cash flows. It is not a means of changing the arrangement of accounts. In this method, managers change the time of operations, the way of allocating resources or the time of implementing investment projects. Profit management activities based on accruals do not have any direct cash flow consequences (Cohen and Zarvein [4], 2008).

On the other hand, the capital market in a country is one of the main sources of financing for companies and governments, and in countries like Iran that seek to attract foreign companies for direct investment as well as the prosperity of their stock market, strengthening it and recognizing the factors related to securities transactions can motivate domestic and foreign companies to enter the field of activity and development. increase investment, in such a way that it provides the proper realization of the major goals of financial and economic development of the government. Creating the necessary conditions to respond more to the needs of investors and to make the Tehran Stock Exchange a prominent stock exchange requires a lot of scientific research. Among these, one of the variables that can help this is the attractiveness of the companies in the stock exchange as well as the degree of liquidity of their shares in the stock exchange, which makes investors able to convert their assets into cash at the lowest cost at any time. According to the models presented for predicting returns, there are many factors that can estimate the returns of different investments. In the meantime, stock liquidity is another factor that has a strong history and literature to investigate its impact on stock returns in different markets, and researchers recognize this variable as one of the factors that can play an important role in determining returns. Assets and portfolio [5] has three features that are related to managing the portfolio. These features include return, risk, and liquidity. Efficiency is easily defined and introduced. Although measuring risk is difficult, it is nevertheless an operational concept. Risk is usually measured by variance and standard deviation of returns. Regarding the pricing model of capital assets, the systematic risk for a share is measured by beta (Schwartz and Franshani[6], 2004, p. 60).

According to the above, the main problem is to examine the relationship between the liquidity of stocks and real profit management of companies listed on the Tehran Stock Exchange.

1-3 Necessity of conducting research

Liquidity of shares and real profit management of companies listed in Tehran Stock Exchange. This research aims to examine the existing empirical evidence and thus examine the degree of conformity of the existing facts with the opinions and reasons raised regarding liquidity and real profit management with the aim that the findings of this research can help capital market activists, decision makers, financial analysts and potential and actual investors of the stock exchange in analyzing investment plans in financial assets and securities with regard to liquidity factors and real profit management; Because considering this important factor leads to the selection of the optimal investment portfolio with minimum risk and maximum efficiency, while also doubling the transparency of the decision-making environment and the results.