The effect of managerial and information performance on conditional and unconditional conservatism

Dissertation for Master's degree (M.A)

Field: Accounting

Dissertation abstract (including summary, objectives, implementation methods and obtained results): managerial performance and information are very important from the point of view of stakeholders, on the other hand, working environment is also one of the qualitative concepts in financial reporting, this qualitative characteristic may be changed by the manager. Based on this, in this research, we looked at the effect of managerial and informational performance on conditional and unconditional conservatism during the years 1387 to 1392 in the companies admitted to the Tehran Stock Exchange in the form of four hypotheses. Using the method of systematic elimination, 102 companies were selected as the final sample of the research, and during the years 1387 to 1392, using the software of the Stock Exchange Organization and the financial reports of the companies admitted to the stock exchange, research data was collected. The research method and statistical analyzes have been carried out in such a way that the Kolmogorov-Smirnov tests for the normality of the data, the Pearson correlation coefficient for the correlation of the data and finally the parametric regression method have been used to test the hypotheses. The findings of the research show that managerial performance has a negative and significant effect with conditional conservatism and a positive and significant effect with unconditional conservatism, which means that the better the performance and efficiency of a company's management, the less conditional conservatism can be observed in their financial reporting, and the more the management performance is at an appropriate level, the more conservatism is included in the company's financial reports (specifically in the balance sheet). The results obtained from testing hypotheses three and four show that companies with higher profit forecasting error use less conditional conservatism. Further, the results showed that the measure of return variability on conditional conservatism and both information performance factors (profit forecasting error and return variability) do not have a significant effect on unconditional conservatism.

Introduction

Investors, as the main suppliers of companies' resources, want complete and accurate information from companies so that they can use it to evaluate management's performance and use the result for their future decisions. In efficient capital markets, it is assumed that all available information is quickly absorbed by individuals and its effects are reflected in the price of securities. That is, the judgment of people and their decisions are reflected in the prices of securities.

Conservatism, as one of the limiting principles of accounting, has been used by accountants for years, and despite many criticisms, it has always maintained its position among other accounting principles. The principle of conservatism causes to apply a method that has the least increasing effect on the net profit and total assets of the company among the various methods. In other words, based on this principle, the company should not use methods that show its incomes and assets more than they actually are, and its costs and liabilities less than they actually are (Wats [1], 2003). Therefore, what is clear is that the evaluation and measurement of management performance and the existence of information efficiency are significant factors for investors and creditors. In this research, we will look for the answer to the question of whether management and information performance can have an effect on conservatism (conditional and unconditional) or not.

In this chapter of the research, after stating the problem, the importance and necessity of the research has been presented and explained, and then the research hypotheses and the scope of the research will be specified, and then the words and terms of the research will be explained.

1-2- Description and statement of the problem

The flood of recent financial scandals around the world, from Enron and WorldCom in the US to the European Parliament, has caused the finger of accusation to be pointed towards financial reporting. Financial statements form the core of the financial reporting process. Financial statements and at the top of them the profit and loss statement (net profit figure) are in the focus of investors' attention. In recent years, the topic of reported profit quality has been the focus of many researchers. One aspect of profit quality is conservatism; It means that the higher the profit conservatism, the higher its quality. The concept of conservatism in accounting has a long history, and according to Basu [2] (1997), the influence of conservatism in accounting reaches at least 500 years.Accountants have traditionally introduced conservatism as "the law of overtaking losses and not overtaking profits". Conservatism is defined by accountants' tendency to require strong documentation (a high degree of verifiability) to identify good news versus bad news. Now, in this research, we are looking to investigate whether the two factors of managerial performance and information can be called factors influencing conservatism, or whether these two variables have no effect on conservatism.

Evaluating management performance is the basis of many decisions, such as managers' rewards, stock prices, stock risk, investment decisions, and other matters. The company and finding solutions to control their performance has many methods as well as its own complexities, but one of the most important indicators is the ratio of net profit on total assets (ROA) (Yoshi Sato [3], 2012). Regarding the performance and efficiency of information, it can be said that the basis for decision-making by participants in the securities markets is the information published by the stock exchange, issuers of securities, and intermediaries active in these markets. It is possible to use this information and make a correct decision in the stock market when the mentioned information is timely, relevant, important, complete and understandable. On the other hand, the type and manner of obtaining information is also important (Holtheisen and Watts [4], 2001).

But the important issue is whether managerial performance and information can affect conservatism as two effective factors or not? Accordingly, in this research, according to the aforementioned theoretical foundations, the relationship between managerial performance and information with conditional and unconditional conservatism is examined. Therefore, conservatism causes the manager and other groups such as shareholders to receive smaller amounts of profit. This increases the value of the company. The increased value of the company is shared among all parties to the contract and the welfare of each group increases. (Watts, 2003). The preparation of conservative financial statements increases the reliability of accounting information. Conservatism's emphasis is on distinguishing between positive and negative stock returns (economic profit and loss) (Basu, 1997). Therefore, identifying factors affecting conservatism can help users of financial statements. In fact, this research becomes necessary due to the fact that private companies form a significant part of Iran's economy, considering that the process of privatization has accelerated with the implementation of Article 44 of the Constitution, the evaluation of managerial performance and information from the perspective of stakeholders is very important.

The methods of measuring the performance of company management and finding solutions to control their performance have many methods as well as their own complexities, the important issue is that research in that field brings the possibility of developing wealth and income for the country and especially for investors in large and small companies. Finally, the findings of this research can be useful for a large number of investors, creditors, managers and other users of financial reports of companies.