Investigating the relationship between conservatism in financial reporting and the liquidity of shares of companies listed on the Tehran Stock Exchange

Abstract

The main purpose of this research is to examine the relationship between conservatism in financial reporting and the liquidity of shares of companies listed on the Tehran Stock Exchange. In this research, conservatism in financial reporting as an independent variable and 13 indices of stock liquidity, including the number of stock trading days, the number of stock trades, the volume of stock trades, the value of stock trades, the percentage of free-floating shares, stock turnover, free-floating stock turnover, stock trading waiting time, stock flow ratio, stock illiquidity ratio (price effect), stock liquidity ratio, the absolute gap between the offer prices for buying and selling shares and the relative gap between the offer prices for buying and selling shares, as dependent variables and from the share price, size, value Book to market value and yield volatility have been used as control variables. The research period is 7 years from 1382 to 1388. The method used to collect information is a library. To test the hypotheses, univariate and multivariate regression models have been used. The results of univariate and multivariate tests show that there is a negative relationship between conservatism in financial reporting and the number of trading days of shares of companies listed on the Tehran Stock Exchange.

Introduction

Senior managers of companies who are responsible for preparing financial statements, having complete information about the company's financial situation, have more knowledge about investors and creditors, and are often optimistic and try to make the image of the business unit look favorable. If the image of the business unit looks favorable, the incentive to inject capital and financial resources through external people will increase. Accounting principles and procedures with the support of accounting standards development authorities, in such circumstances, in order to balance the optimism of managers and protect the rights of beneficiaries and fair presentation of financial statements, uses the concept of conservatism. In this way, conservatism, as one of the limiting principles of accounting, has been used in accounting for years, and despite many criticisms, it has always maintained its position among other accounting principles. Therefore, conservatism can be mentioned as a mechanism that, if used correctly, leads to the solution of many problems of companies, so it seems that companies not only have the task of carrying out economic activities, but also have to report on the results of their activities, and to the same extent that they are expected to try to reduce their costs and revenues in carrying out economic activities, they try to direct their financial reporting in a direction that the interpreters of financial statements lead to the transfer of wealth Do not leave the company. In other words, companies, apart from the honest presentation of the results of operations and financial status, which is desired by the institutions that compile accounting standards, also pay attention to the economic consequences of financial reports. Attention to the economic consequences sometimes causes financial statements to no longer be prepared with the aim of honestly presenting the results of the company's activities. Failure to truthfully present operating results generally manifests itself in the form of under- or over-reporting of profits. All the methods used in order to provide less profit than the reality, which are in the framework of accounting standards, lead to a kind of information asymmetry in the identification of profits and losses (Ebrahimi Kardler, 2018, 4). Information asymmetry will have different adverse consequences, such as increasing transaction costs, market weakness, low liquidity, and generally reducing profits from transactions in the capital market. Wimin (2005) [1] believes that liquidity is the ability to quickly trade a large volume of securities at a low cost. This means that the price of the asset does not change much between the order and the purchase. Using various indicators and criteria, he examined the relationship between the element of transparency in information reporting and market liquidity. The results show that companies with better disclosure mechanisms and lower price gap have higher stock quality. In the Iranian capital market, the relationship between conservatism in financial reporting and stock liquidity has not been investigated..

In this research, due to the need to enrich the accounting literature in this field and especially in the Iranian capital market, and considering the importance of stock liquidity, the relationship between conservatism in financial reporting and the liquidity of shares of companies listed on the Tehran Stock Exchange has been investigated.

1-2. Statement of the problem

According to the increasing importance of liquidity, knowledge about the factors affecting it can be helpful in its improvement. The role of liquidity in discovering the price of assets, distributing financial risk and reducing the cost of transactions, it is important to know the factors affecting it. Liquidity is the degree of ease in buying and selling a product without significant change in its price) (Golsten et al. [2], 1985, 71-73). In this research, we have examined the effects of conservatism on stock liquidity, but what is the importance of stock liquidity and why are we studying it? One of the characteristics of efficient and very desirable markets is the absence of transaction costs and, as a result, high liquidity. Transaction costs include a wide range of obvious costs including tax and brokerage and non-obvious costs due to information inefficiency. Therefore, stock liquidity can be a measure of market efficiency. In addition to the theoretical aspect, it is necessary to pay attention to liquidity and try to solve this problem in practical terms and according to existing realities such as the phenomenon of buying and selling queues and many other problems. An increase in liquidity can lead to a greater distribution of financial risk by reducing the costs of portfolio rotation and motivating more investors in trading decision-makers. With an increase in liquidity, the cost of transactions will decrease significantly.

Liquidity also plays an important role in the process of price discovery. Considering the role of liquidity, it is important to know the factors affecting it (Rahmani et al., 2019, 40). The concept of conservatism in accounting has a long history. Watts [3] (2003), has defined conservatism in telling accountants as follows: "Do not anticipate any profits, but anticipate all losses." Basu[4] (1997), has interpreted this proverb as "the tendency of accounting to require a higher degree of verifiability to identify good news or profit compared to the level of verifiability necessary to identify bad news or losses". 1554). The more confidential information is, the range of the difference in the bid prices for buying and selling shares between investors increases, and as a result, the return of investors who do not have access to such information decreases (Cheng[6] et al., 2009, 152). This is consistent with the results of many experimental researches. Ghaemi and Watanparast (2004), while referring to the detailed history of the issue at the world level, have shown that in the Tehran Stock Exchange, the increase in information asymmetry between traders widens the scope of the offered price for buying and selling shares. But the issue of the difference in the bid price of shares is rooted in the abnormal supply and demand flow. Abnormal supply and demand arises as a result of confidential information; When there is bad confidential news, the supply of the stock increases and the bid price decreases. On the contrary, when there is good confidential news, the demand increases and the bid price also increases. If there is no confidential information, the effects of public information available by market makers are reflected in the stock price. That is, when the market makers receive the information, they direct the price to the appropriate level, and as a result, unusual buying and selling does not take place. Stock markets closely monitor agency costs and share price declines. Lafond and Watts [7]

admit that the decrease in stock price in the managers' shareholders creates the incentive to reduce the information asymmetry and the resulting agency costs. For this purpose, they turn to conservative reporting.