Investigating the complementary role of operating cash flow in explaining stock returns

Dissertation

To receive a master's degree

      in the field of accounting

Abstract

In this research, the complementary role of operational cash flow in explaining the stock returns of companies listed on the Tehran Stock Exchange has been investigated. The statistical sample of the research includes 98 companies during the period from 1387 to the end of 1392. In this research, to study the effect of each of the above-mentioned factors, static consolidated data methods were used and to select a statistical sample, systematic elimination method (screening technique) and Generalized Least Squares (GLS) method were used. The negative relationship indicates that the more timely the profit, the lower the abnormal return of the public offering, in other words, the more timely the profit, the less the information asymmetry. Financial reporting through transparent disclosure of financial information of companies can reduce information asymmetry, optimal allocation of resources (right choice instead of wrong choice), and efficiency of company performance. Playing this accounting role also helps in economic development. One of the key elements of financial reports is net profit. The net profit reported in financial statements is considered one of the most important criteria for evaluating the performance of a business unit, which is always used by a wide range of users such as investors, shareholders, financial managers, stock market analysts and tax rate. Managers' authority to use the principles of realization, matching and estimation and the manipulations done by them are among the factors that affect the transparency of profit. Many managers may make the situation of the company look favorable for reasons such as staying in the company and receiving a reward, either intentionally or unintentionally. Therefore, the financial information published in the financial statements, especially the accounting profit, which is the basis of many decisions, is not transparent and ambiguous. The lack of transparency and the inappropriate quality of the disclosed accounting profit lead to a situation where it is possible to obtain a return higher than the normal return of the company. In other words, the non-transparency and vagueness of the accounting profit will lead to abnormal stock returns. This result can be used by users of financial statements, capital market analysts and law makers.

Key words: operating cash flow, abnormal return, consolidated data.

Introduction

The relationship between stock market returns and accounting profit and how and when the capital market reacts to the information related to profit is of particular importance in order to study the efficiency of the capital market and also evaluate the usefulness of the information in the financial statements. is Investors, creditors and other users of financial statements use the information reflected in accounting profit to evaluate profitability, net cash inflows and predict future profits. The usefulness of the information reflected in the accounting profit is confirmed when the accounting profit can help investors and creditors in predicting cash flows, in terms of amount, time of acquisition and degree of uncertainty. The return of securities is the main motivation for investing in the stock exchange, and evaluating and predicting market returns can be considered an effective help in making rational decisions for investors, and the result of this is the optimal allocation of society's limited resources. 1-2 Statement of the problem Accounting, as an information system, has products to achieve a set of goals. The main purpose of the accounting system is to provide useful financial information for decision-making, and perhaps this is the most logical and accurate goal that can be drawn for accounting, and the basic financial statements (the basic product of the accounting system) are the main means of transmitting information to users. On the other hand, in the field of predicting stock returns, which is one of the topics of interest to investors and financial researchers, so far many efforts have been made to provide a model that can reliably predict stock returns.Until the 1990s, it was believed that the Capital Asset Pricing Model (CAPM) is a perfect model for predicting stock returns, but research results showed that this model does not have the necessary ability to predict stock returns. With the loss of validity of this model, many attempts have been made to replace the model that can determine stock returns in the best way, but financial researchers have not yet agreed on an alternative model.

Currently, investors can predict stock returns to some extent by creating a bridge between stock returns and other accounting information (including cash flow statement information), provided that accounting information has an effect on price or in other words, the market is at a strong level in terms of efficiency. be Basic financial statements are extracts of all financial activities and events that occurred during a period of time, usually one year. For example, the balance sheet provides useful information about assets, liabilities and equity and the relationship between them at the end of the financial period. In the case of Sudozian, the results of continuous and main operations are also reported. However, the measurement of the items reflected in Sodouzian's invoice and balance sheet is based on the accrual assumption, and for this reason and due to the inherent problems caused by the application of allocation methods and the use of the historical cost of events and operations, doubts have arisen regarding the adequacy of the aforementioned financial statements in meeting the needs and information needs of users. It has moved towards information based on cash basis. From a theoretical point of view, cash flows can be useful in all dimensions of decision-making, such as risk assessment related to the amount and timing of loans, forecasting the amount of credit, valuing company shares and providing additional information for the stock market. In recent years, cash flows from operating activities along with profits are considered as one of the evaluation criteria of companies. Most of the studies that have been conducted in the field of the relationship between profit and return and have considered a period of one year or less, report a weak relationship between profit and market return; In other words, the explanatory power of profit in relation to return is weak. In this context, it is possible to refer to the study of "Kaznik and Liu[1]", "Warfield and Wild[2]" and "Bal and Kotari[3]".

Liu collects and summarizes the studies conducted in the 1980s in this field and it is found that in most studies, the correlation coefficient of return and profit is very low and rarely reaches above 10%. The results of studies in which a longer-term perspective is used, show that the longer the measurement interval becomes, the correlation coefficient between profit and return also improves and increases. Among these researches, it is possible to mention the study of Liu (1989), "Easton, Harris and Ohlson-Hine[4]" (EHO).

The logic of "relationship between profit and efficiency" was presented by Ball and Brown in 1968. The title of "Ball and Brown[5]" was "Empirical evaluation of accounting profit figures" and their null hypothesis was that: "Accounting profit figures are not useful for stock market investors." The result of their research led to the rejection of the null hypothesis. The summary of the results of their study is as follows:

"A brief overview of the stock price in connection with the publication of the profit report, shows that the information reflected in the profit figure is very useful and the change in the reported accounting profit compared to the previous year has a positive correlation with the change in the stock price." Information in the capital market will be useful when it leads to the reaction of investors, including changes in stock prices or changes in the volume of stock exchanges.

The basic paradigm of profits and returns is a hypothesis based on which the capital market is efficient against the release of relevant information that is made available to the public. The efficient market hypothesis refers to the speed of reaction of capital market securities to the announcement of new information. The definition of market efficiency is that:

The capital market fully reflects available information.

Market prices react immediately to new information. In other words, new information quickly affects the price of securities