Evaluation of the relationship between accounting conservatism and bankruptcy risk in companies listed on the Tehran Stock Exchange

Abstract:

This study examines the relationship between conservative accounting and bankruptcy risk, where conservatism increases assets and cash, and bankruptcy as a condition in which There is not enough cash. It follows, so the accounting theory indicates the existence of a relationship between these two categories. In this research, the classification of conditional and unconditional conservatism and the bankruptcy prediction model of Zaugin and Altman, which provide a spectrum of bankruptcy probability, have been used. In order to examine the relationship in the conditions of the capital market of Iran in the period of 2018-2019, the study population includes companies admitted to the Tehran Stock Exchange, which were selected using the method of systematic elimination of companies that did not provide the information required for our research, and a total of 76 companies were selected. So the variables of the research have been identified and in order to analyze the information, the data obtained from the new Rahavard software has been used to calculate the variables of the research using the Excel software. These data were analyzed by Spss software with the help of descriptive and inferential statistics such as correlation analysis to test the hypotheses. From this research, the first main hypothesis was obtained: There is a significant relationship between accounting conservatism and bankruptcy risk according to Altman's model in the Iranian capital market. Regarding the division of conservatism into conditional, the statistical components obtained from the statistical tests related to the variables of this hypothesis show that the variables have a linear and inverse relationship with each other. As a result, the linear assumption of the relationship between conditional and unconditional conservatism and bankruptcy risk is confirmed. The second main hypothesis: There is a significant relationship between conservatism and bankruptcy risk in Iran's capital market according to Zaugin. Considering the measurement of conservatism through the division between conditional and unconditional conservatism, the statistical components obtained from the statistical tests related to the variables of this hypothesis show that conditional and unconditional conservatism have a linear and inverse relationship with bankruptcy risk according to Zaugin's model. As a result, the assumption of linear relationship between variables is confirmed. The comparative results of the two main research hypotheses also indicate that the relationship between conditional conservatism and bankruptcy risk according to the Altman and Zavgin models is stronger than the relationship between unconditional conservatism and these two models. The results obtained in this research are in perfect agreement with other global researches, especially the results of Frank et al.'s research (2010) and can help all internal and external stakeholder groups in making their decisions.

Key words: accounting conservatism, conditional conservatism, unconditional conservatism, bankruptcy risk, Altman model, Zavgin model

Introduction:

Today, the rapid development of technology and vast environmental changes have given increasing momentum to the economy, and the increasing competition of institutions has limited the achievement of profits and increased the probability of bankruptcy. On the other hand, owners, investors, business partners and creditors are interested in evaluating the success of a company and its tendency to bankruptcy by relying on the financial reports of companies. In the financial decisions of investors and creditors about an institution, financial statements play a fundamental role. Financial statements are the main part of the financial reporting process. The objectives of financial reporting and accounting principles require that the information that constitutes financial reporting have certain characteristics. In the concepts of Iranian reporting, characteristics are mentioned as qualitative characteristics, one of these qualitative characteristics is conservatism. Accounting conservatism follows the increase of assets and cash in bankruptcy as a condition that there is not enough cash. Therefore, considering the relationship between liquidity and bankruptcy risk, applying conservatism by increasing available cash and making it flow by companies that are under financial pressure will cause these companies to have lower bankruptcy rates. Based on this, conservatism is often negatively related to bankruptcy risk.Accounting conservatism follows the increase of assets and cash of bankruptcy as a condition that there is not enough cash. Therefore, according to the relationship between liquidity and bankruptcy risk, applying conservatism by increasing available cash and making it flow by companies that are under financial pressure will cause these companies to have a lower bankruptcy rate. Based on this, conservatism is often negatively related to bankruptcy risk. The most important goal of this study is to theoretically determine the indicators of conservatism, to test these indicators. and providing the necessary evidence to help the Iranian capital market actors to make rational decisions in the management and investment process. 1 Introduction Investors, as the main suppliers of companies' resources, want complete and accurate information from companies. In efficient capital markets, it is assumed that all available information is quickly absorbed by people 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. Accounting information is manifested in financial statements, investors always consistently and uniformly use accounting information without adjusting this information in terms of changes made in accounting methods or paying attention to how it is calculated (Henrikson, 1982, p. 15) [1] Among the most important accounting information is the profit and loss statement, investors pay the most attention to net profit as the last item of information in the profit and loss statement. Profit as the final result of the accounting process that this The value of attention and emphasis of the users of accounting information is calculated under the influence of the accounting procedures chosen by the management. The ability to choose accounting procedures gives management the opportunity to make decisions about when to recognize and measure expenses and income. The management is motivated to stabilize the company's profit growth by applying other conservative accounting procedures. This increases the expectations of shareholders in the coming years (Wats, 2003, pp. 287-301) [2].

Attention to this point by company managers and investors' decisions is effective. The presence of confidential information of managers and inaccuracy in reported information will increase information risk (same source, p. 967) [3].

The possibility of bankruptcy is affected by information risk. The information disk depends on the amount of confidential information and the inaccuracy of the public information provided.

The more asymmetric information and the less accurate the information provided, the higher the risk of bankruptcy (Watts, 2003, p. 1010) [4].

In order for the reported profit to help users evaluate the performance and profitability of a company, and investors rely on Profit information should make the right decisions. Information should be presented in a way that makes it possible to evaluate past performance and be effective in measuring profitability and predicting profitability. Therefore, in addition to the fact that the reported profit figure is important for investors to ensure the continuation of the company's activity and is effective on their decision-making, the quality characteristics of profit are also of particular interest to investors as one of the dimensions of profit information (Francis et al., 2002, p. 967) [5].

In this chapter, the introduction regarding conservatism is first presented and then the importance and necessity of the research is presented and explained, and then the research hypotheses and the scope of the research are specified and then the words and terms of the research are explained.

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 expenses and liabilities less than they actually are (Wats, 2003, p. 53) [6]

Abstract:

This research studying the relationship among conservatism accounting and bankruptcy risk. That conservatism leads to the properties and cash increasing, and bankruptcy imitating as a condition that there isn't enough cash. So, accounting theory indicating the relationship between these two topics. This research uses the conditional and unconditional conservatism classification and from Zavgin and Altman bankruptcy anticipation model that presents a vast spectrum of bankruptcy.