The role of financial reporting quality in reducing the limiting effects of dividend policy on investment decisions

Number of pages: 190 File Format: word File Code: 29846
Year: 2014 University Degree: Master's degree Category: Librarianship
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    Dissertation for Master's Degree

    Major: Accounting

    Abstract

    The theory of dividend irrelevance predicts that in efficient capital markets, dividend policy should not affect investment decisions. While in the inefficient markets, the restrictions on the supply of foreign funds that come from asymmetric information can force companies to abandon valuable investment projects in order to pay dividends. In this research, the role of financial reporting quality as an independent variable in reducing the limiting effects of dividend policy on investments has been examined and tested. Therefore, the purpose of this research is to test the role of financial reporting quality in reducing the competition between profit distribution decisions and investment decisions in companies for internal funds and resources through reducing information asymmetry and improving access to external funds and resources, which requires the need for independent research in Iran's capital market. For this purpose, the data of 122 active companies in Tehran Stock Exchange during the period of 6 years from 1386 to 1391 (732 years - companies) has been considered as a statistical sample by systematic elimination method. In order to test the research hypotheses, the combined regression method and the panel (fixed and random effects model) have been used. The findings and results of the research using multivariate linear regression analysis show that the high quality of financial reporting significantly reduces the negative effect of dividend distribution on investments.   But this reducing effect for research and development investments has not been significant. In addition, the moderating role of financial reporting quality is more important, especially for companies where a major part of the company's value depends on their growth opportunities. These results clarify the important role of the quality of financial reporting in adjusting the conflict between investment decisions and dividend distribution of companies, thereby reducing the possibility that companies abandon valuable investment projects and plans in order to pay dividends.

    Key words: quality of financial reporting, dividend distribution, investments

    1-1) Introduction

    Rapid growth and transformation of economic relations, leading to intense competition in the field Trade, industry and investment. Therefore, companies need to make appropriate and timely investments in order to survive and expand their activities. Financial reports of companies must provide information that is useful for potential and actual investors, creditors and other users, in rational investments, granting credit and similar decisions. Financial reports must provide information necessary to evaluate the financial status and economic base of the company, evaluate the performance and profitability, evaluate how to finance and use cash, evaluate how to fulfill the responsibility of managing management and perform legal duties and provide To provide supplementary information for a better understanding of the provided financial information and predict the future situation. As a result, these reports are very important in achieving the aforementioned goals and increasing their quality can make companies' investments more efficient and preserve and develop their resources. Today, accounting information systems play a very important role in the circulation of organizations and play an important role in the economic environment of countries. Many economic decisions are made based on the information obtained from these systems, and a major share of securities exchanges is devoted to the purchase and sale of company shares, which in turn can be influenced by accounting figures and information. Any research in the field of how accounting information affects a wide range of interested decision-makers in companies helps to better understand the role of this information and the need for more and better disclosure. Since shareholders and creditors are the two main groups that use financial information, and providing relevant and reliable information for these two groups is one of the main concerns of management and accounting information systems, it is necessary to pay attention to the quality of the information prepared for these two groups.

    The main role of financial reporting is the effective transfer of financial information to people outside the organization in a reliable and timely manner, one of the main goals of which is to provide the necessary information to evaluate the performance and profitability of an economic enterprise.The necessary condition to achieve this goal is to provide financial information in a way that makes it possible to evaluate the past performance and is effective in measuring the profitability and predicting the future activities of the economic enterprise. But despite the same regulatory mechanisms on financial reporting of companies, it seems that companies do not have the same quality of financial reporting, and this indicates that many other factors probably cause differences in the quality of financial reporting of companies. The quality of financial reporting is the accuracy and correctness of financial reports in expressing information related to the company's operations, especially the expected cash flows, in order to inform investors. According to the concept statement number one of the Financial Accounting Standards Board, financial reporting should provide useful information that helps actual and potential investors to make rational decisions. Also, according to Statement No. 37 of the Financial Accounting Standards Board, financial reporting provides information that helps actual and potential investors in evaluating the amounts, timing, and uncertainty of future cash receipts. Therefore, measuring the quality of accruals is generally used as an indicator for the quality of financial reporting, based on the view that accruals improve the informational value of profit by reducing the effect of unstable fluctuations in cash flows. Accruals are also estimates of cash flows and future income. The quality of financial reporting improves the usefulness of financial information. Therefore, it is clear that the legislators and investors agree to have more quality financial reporting because the final belief is that the quality of financial reporting directly affects the capital markets. Therefore, considering that the quality of financial reporting has an important effect on the capital markets, it can be concluded that at the macro level, the quality of financial reporting has economic effects. Also, in relation to investment opportunities, a company that has high flexibility to use these opportunities has a clear vision of its future, and among the effective policies in creating investment opportunities, the use of dividend policies is appropriate.

    The relationship between dividend policy and investment in an imperfect market is very important. Because companies cannot easily issue securities or take loans, so they try to use internal financial resources, i.e. accumulated profits. Therefore, if financial managers are faced with investment opportunities that have a positive net present value and financial resources are limited, then investment policies and profit sharing policies will be related to each other.

    Profit sharing can be discussed from two very important aspects. On the one hand, it is a factor affecting the investments faced by companies. Because profit sharing reduces internal resources and increases the need for external resources. On the other hand, many shareholders of the company want to distribute cash dividends. Therefore, with the aim of maximizing wealth, managers must always balance their different interests and profitable investment opportunities. Therefore, the dividend distribution decisions made by company managers are very sensitive and important.

    1-2) Statement of the problem

    Miller and Modigliani[1] (1961) have proven that in an efficient capital market, the dividend policy is considered an irrelevant element in determining the company's value. Because first: only investments that create cash flows and future benefits affect the value of the company, and secondly: investments are independent of profit distribution. After that, the use of the term "separation principle" [2] by Fama and Miller [3] (1972) provided an important prediction related to the theorem and the argument of the irrelevance of the dividend policy:

    "The dividend policy should not affect investment decisions".

    But in inefficient markets, the dividend policy can be effective on investment decisions. When managers have more information about the value of the company's assets and investment projects than external investors (outside the organization), problems and issues related to "improper selection" [4] and "moral hazard" [5] can limit companies in obtaining external funds (for financing). (Jensen and McLing 1976 [6], Myers and Majlov [7] 1984).

  • Contents & References of The role of financial reporting quality in reducing the limiting effects of dividend policy on investment decisions

    List:

     

    Table of Contents

    Title

    Abstract 1

    Chapter 1 - General Research

    1-1) Introduction. 3

    1-2) statement of the problem. 5

    1-3) The importance and necessity of research. 6

    1-4) research objectives. 7

    1-4-1) Scientific goals. 7

    1-4-2) practical goals. 8

    1-5) theoretical framework. 8

    1-6) research assumptions. 11

    1-7) study limits. 11

    1-7-1) Research area. 11

    1-7-2) The time domain of research. 11

    1-7-3) Subject area of ??research. 11

    1-8) Definition of words and research terms. 12

    1-9) research structure. 13

     

    Chapter Two - Theoretical Foundations and Research Background

    2-1) Introduction. 16

    2-2) Quality elements of financial reporting. 16

    2-3) The quality of financial statements in comparison with the quality of financial reporting. 18

    2-4) Different approaches to evaluate the quality of financial reporting. 18

    2-4-1) approach to users' needs. 19

    2-4-2) Investor/shareholder protection approach. 20

    2-5) proposed framework. 21

    2-6) Objectives of financial reporting. 22

    2-6-1) providing the necessary information to assess the financial situation and economic base. 22

    2-6-2) Providing necessary information to evaluate performance and profitability. 22

    2-6-3) Providing the necessary information to evaluate how to provide and use cash. 23 2-6-4) Providing necessary information to evaluate how to fulfill the responsibility of managing management and performing legal duties 24 2-6-5) Providing supplementary information for a better understanding of the provided financial information and predicting the future situation. 25

    2-7) questions related to the evaluation of reporting quality. 26

    2-7-1) Continuity of profit: 26

    2-7-2) Separate information: 27

    2-7-3) Confirmation value: 27

    2-7-4) Timeliness: 28

    2-7-5) Processability: 28

    2-7-6) Completeness: 29

    2-7-7) Content: 29

    2-7-8) Neutrality: 30

    2-7-9) Comparability: 31

    2-7-10) Procedure consistency: 31

    2-7-11) Transparency (clarity): 32

    2-8) Qualitative features of accounting information. 32

    2-8-1) Qualitative characteristics related to information content. 33

    2-8-1-1) Relevancy: 33

    2-8-1-2) Reliability: 34

    2-8-2) The main qualitative characteristics related to providing information: 35

    2-8-2-1) Comparability: 35

    2-8-2-2) Comprehensibility: 36

    2-9) international qualitative characteristics of information. 36

    2-10) executive restrictions governing the qualitative characteristics of financial information. 37

    2-10-1) Timeliness: 37

    2-10-2) Increase of benefits over cost: 38

    2-10-3) Importance: 38

    2-10-4) Balance between quality characteristics: 38

    2-11) Concept of benefit quality. 39

    2-12) The importance of profit quality assessment. 40

    2-13) methods of measuring profit quality. 41

    2-13-1) Measuring profit quality based on the characteristics of profit time series. 42

    2-13-1-1) Profit stability. 42

    2-13-1-2) Predictability. 43

    2-13-1-3) Changeability. 44

    2-13-2) measuring the quality of profit based on the relationship between profit, accruals and cash. 44

    2-13-2-1) Ratio of cash from operations to profit. 46

    2-13-2-2) Prediction of optional components of accrual items with the help of accounting variables. 47

    2-13-2-3) predicting the relationship between accruals and cash flows. 49

    2-13-3) Measuring profit quality based on the qualitative characteristics of the FASB conceptual framework. 49

    2-14) Concepts related to profit sharing policy. 50

    2-14-1) Profit sharing policy. 50

    2-14-2) Objectives of profit sharing policy. 52

    2-14-3) Determining factors of profit sharing policy. 53

    2-14-4) Theories related to dividend policy. 56

    2-14-4-1) Full information model - tax factor: 57

    2-14-4-2) Information inequality model (information asymmetry): 58

    2-14-4-3) Behavioral models: 60

    2-15) Research background. 62

    2-15-1) Foreign research. 62

    2-15-2) Internal investigation. 67

    2-16) study history. 74

    2-17) Summary of the chapter. 79

    The third chapter - method79

    Chapter 3 - Method of conducting research

    3-1) Introduction. 82

    3-2) Research method. 82

    3-3 (Study population and statistical sample. 83

    3-4) Analytical model and method of measuring research variables. 86

    3-4-1) independent variables. 86

    3-4-1-1) Quality of financial reporting: 86

    3-4-1-2) Profit sharing: 89

    3-4-2) Dependent variables. 89

    3-4-2-1) Total investment: 89

    3-4-2-2) Investment in research and development: 89

    3-4-2-3) Capital expenditures (invested funds): 89

    3-4-3) Control variables. 89

    3-5) Information collection methods. 90

    3-6) The method of analyzing information and research tests. 90

    3-6-1) Regression analysis. 92

    3-6-2) Examination of variance heterogeneity. 93

    3-6-3) Checking autocorrelation. 93

    3-7) Hypothesis testing method: 94

    3-7-1) First hypothesis testing method. 94

    3-7-2) Method of testing the second hypothesis. 94

    3-7-3) Method of testing the third hypothesis. 95

    3-8) General steps of data analysis: 96

    3-8-1) Panel data method. 96

    3-8-1-1) fixed effects method: 97

    3-8-1-2) random effects method: 98

    3-8-2) Chow or F-Limmer test: 98

    3-8-3) Hausman test: 99

    3-8-4) model significance test. 100

    3-8-5) The significance test of research variables. 100

    3-8-6) Tests related to the assumptions of the linear regression model. 101

    3-8-6-1) Assumption of normality of variables and residuals: 101

    3-8-6-2) Assumption of non-collinearity between independent variables: 102

    3-8-6-3) Assumption of independence of residuals: 102

    3-8-6-4) Assumption of equality of variance of residuals: 102

    3-8-7) Deciding to reject or accept the hypotheses 103

    3-9) Summary of the chapter: 104

     

    Chapter IV - Model estimation and research findings

    4-1) Introduction. 106

    4-2) Descriptive statistics of research variables. 106

    4-3) unit root tests. 107

    4-4) Checking the normality of dependent variable(s). 109

    4-5) Investigating the correlation between research variables. 110

    4-6) Collinearity check between the independent research variables. 112

    4-7) The results of the first hypothesis test. 112

    4-7-1) Deciding on rejecting or accepting the first research hypothesis. 119

    4-8) The results of the second hypothesis test. 120

    4-8-1) Deciding on rejecting or accepting the second research hypothesis. 126

    4-9) The results of the third hypothesis test. 126

    4-9-1) Deciding on rejecting or accepting the third research hypothesis. 132

    4-10) chapter summary. 133

    Chapter Five - Conclusions and Suggestions

    5-1) Introduction. 135

    5-2) research summary. 135

    5-3) Evaluation and description of the results of the hypothesis test 135

    5-3-1) The results of the first hypothesis test. 135

    5-3-2) The results of the second hypothesis test. 136

    5-3-3) The results of the third hypothesis test. 137

    4-5) General results of the research. 138

    5-5) suggestions 140

    5-5-1) suggestions based on research findings. 140

    5-5-2) Suggestions for future research. 141

    5-6) Research limitations. 141

    5-7) Summary of the chapter. 142

    Sources and sources. 143

    Appendices 149

    English abstract 178

     

    Source:

     

    Sources and sources

    Persian sources

    1. Scott, William.  (1388).  Theory of Financial Accounting, Ali Parsaian, first volume, Tehran, Termeh
    2. ________. (1388). Financial accounting theory, Ali Parsaian, second volume, Tehran, Terme
    3. Azer, Adel. Mansour Momeni. (1389). "Statistics and its application in management", first volume, 14th edition, Samit Publications, Tehran.
    4. Ashnagar, Mahmoud. (1389). The usefulness of dividends in explaining stock returns in companies listed on the Tehran Stock Exchange, a master's thesis under the guidance of Dr. Majeed Zanjedar. Islamic Azad University, Arak branch. Behramfar, Naghi and Mehrani, Kaveh. (1383). The relationship between earnings per share, dividends and investment in companies listed on the Tehran Stock Exchange, Quarterly Journal of Accounting and Auditing.
The role of financial reporting quality in reducing the limiting effects of dividend policy on investment decisions