The effect of the quality of profit forecast of the investee company with the investment decisions of the investor company in Tehran Stock Exchange.

Dissertation for receiving the master degree "M.A."

Accounting - Accounting

Abstract

A main factor of successful investment is the ability of management to predict the efficiency of projects; Because forecasting plays a major role in investment evaluation methods. Therefore, corporate investment decisions require managers to predict expected cash flows from potential investments. Although this forecasting and estimation is a critical component of successful investment and depends on the value of the company, most of these forecasts are internal and therefore not directly observable by external stakeholders. However, it is expected that the ability to forecast projects by the management, which is a type of internal forecasts, appears in the external and voluntary forecasts of the management, such as the profit forecast. But the importance of the forecasted profit depends on the amount of deviation it has with the actual amount. The smaller the deviation, the more accurate the prediction. Researches show that the market places considerable value on the fulfillment of the profit expectations of each share and reacts to its non-fulfillment.

The purpose of this research is to study the impact of the profit forecast quality of the investee company with the investment decisions of the investee company in the Tehran Stock Exchange. In this research, the accuracy of profit forecasting was used as a criterion to measure the quality of profit forecasting. For this purpose, 121 companies from among the companies admitted to the Tehran Stock Exchange between 1388 and 1392 were selected as a sample of investable companies. (long-term and short-term investment) was investigated, and on the other hand, its effect on stock returns, operational returns, abnormal returns, and the ratio of book value to market value of the investing company was investigated. The research has been carried out in the framework of deductive-inductive reasoning. In this research, panel analysis has been used to analyze the hypotheses.  The findings of the research show a positive and significant relationship between the accuracy of the investment company's profit forecast with the horizon of holding shares by the investing company and the return on shares and operational efficiency and the ratio of the book value of each share to the market value of the invested company. But the research showed that there is no significant relationship between the accuracy of the profit forecast of the investee company with the changes in the amount of investment in that company in the offices of the investor company and the abnormal return of the investee company.

Key words: quality of profit forecast, accuracy of profit forecast, investment decisions, investor company, investee company, stock holding horizon, investment volume, operational return, stock return, abnormal return

1-1-Introduction

Firms' investment decisions require managers to forecast expected cash flows from potential investments. Although this forecasting and estimation is a critical component of successful investment and depends on the company's value, most of these forecasts are internal and therefore not directly observable by external stakeholders. However, it is expected that the ability to forecast projects by management, which is a type of internal forecasts, appears in external and voluntary forecasts of management, such as profit forecast (Goodman et al. [1], 2013). Therefore, this type of forecasts, which are voluntarily disclosed, may be valuable for foreign shareholders; Not only because of providing managers' expectations of the next period's profit, but also because of revealing information about managers' knowledge of the company's economic environment; and the ability to predict future business prospects, which is a main component in the investment decision process. (Truman[2], 1986)

Profit is one of the main and important items of financial statements that attracts the attention of users of financial statements.Investors, lenders, managers, company employees, analysts, government and other users of financial statements use profit as a basis for making investment decisions, granting loans, interest payment policy, evaluating companies, calculating taxes and other decisions related to the company (Qassemi, 2014).

The profitability of a company is one of the most important criteria for evaluating companies by investors The reported profits of the company are information related to the past, but according to them, it is possible to evaluate the way the company operates and its success rate in the past. If investors use the past as a basis for the future, they can use past information to guess what the company's situation will be like in the future, but this is only a guess based on past information, while the future may be different from the past (Arabi Mazeah Shahi, 2010). But investors need information about the company's future (Rogers et al.[3], 2009).

Therefore, according to this need and the needs of other users and investors, managers act on the prediction of profit per share. Forecasting profit and its changes as an economic event has long been of interest to investors, managers, analysts, and other users. The most important source of information for investors and other users is the profit forecast provided by the companies (Melkian et al., 2019).

In Iran, based on row (7) clause (c), the managers of the companies admitted to the Tehran Stock Exchange are required to send their monthly and one-year revenue forecasts to the management of the supervision of companies of the Tehran Stock Exchange Organization no later than 20 days after the end of the three-month period (Latfi and Haji). Pour, 1389).

According to the importance of profit forecasting, knowing the effective factors in its forecasting provides useful information for stakeholders. But what is important in this category is to pay attention to the quality of profit that is used as a predictor (Momonzadeh Gol, 2019). But there are several indicators and criteria to measure the quality of profit, and in this research we will use the accuracy criterion of profit prediction. The smaller the deviation, the more accurate the prediction. Researches show that the market places considerable value on the fulfillment of the expectations of profit per share and reacts to its non-fulfillment (Rees[4], 2007).

Most previous studies have considered current profit as a measure of return on investments and also as a measure for investors' investment decisions, but this research predicts profit in the years before the occurrence (three years before) as a measure of the return on investments of an investable company and accordingly investment decisions. Investment companies consider and test the effect of the quality of the profit forecast using the criterion of the accuracy of the profit forecast on the investment decisions of the investor company in the Tehran Stock Exchange. 1-2-Statement of the problem and the nature of the research subject Profit is derived from the change in equity or the change in the net assets of a business unit during a financial period, to be more precise, profit is the result of all changes in the equity of the capital during a financial period. The exception is the changes caused by the investment by the owners and the distribution of resources between them (Alipour, 2013).

Profit is one of the best indicators for measuring the activities of an economic unit. (Thaghafi and Aghaei, 2003) But shareholders do not only pay attention to the profit of the current period, but they also pay attention to the future profits to determine the value of shares (Penman [5], 2003).

Forecasting is the process of estimating unknown situations. A forecast provides a prediction about future events and can turn past experiences into predictions of future events (Kalpi et al.[6], 1992).

Forecasting helps investors to improve their decision-making process and reduce the error of their decisions. They are interested in estimating the future benefits of their investment so that they can judge about receiving future cash dividends as well as the value of their shares (Ziba Khajeh Mahmoud, 2013).

And empirical evidence shows that investors rely on information such as the forecast of profit per share and use it in stock pricing. These forecasts represent management's expectations of the company's future performance.