New York Science Journal 2014;7(7)
Evaluation the principal components of accounting and its impact on the stock returns of listed companies in Tehran Stock Exchange
Alireza Babaei1, Mohammad Babaei2, Hamed Abdi2, Mohadeseh Rezaei3
1.MSc of Accounting, Islamic Azad University, Scientific Research Branch, Tehran, Iran
2.MSc student of Accounting, AllameTabatabaei University (ATU), Tehran, Iran
3.MSc student of Accounting, Islamic Azad University, Tehran Center Branch, Tehran, Iran
Abstract: In thisstudy, the principal components of accounting and its impact on the stock returns of listed companies in Tehran Stock Exchange was investigated fora5 year periodfrom 2006-2010. The main basis foranalysisinthis researchis relationship betweenaccounting and stock returns. Inthisstudy,indicatorsto assess operating management, investment management andfinancial managementthataffectstock returnsareexamined. In thehypotheses testingofthis study,apanelleast squares regressionmodelswere used that examinesthe relationship betweenfinancial ratiosand stock returns simultaneously. Resultsshow thatstock returnsonlyhave positive and significant relationship with assetturnover ratio which isanindicator ofperformance evaluationof operatingmanagement. The results alsoindicate thatthe operational performanceofthecompanystock returns would increasebusiness opportunitiesandalsoenhance thecompany's abilityto earnincomethroughsales.The results of thisstudycan helpmanagersselectand implementtradepolicy andeconomicpolicycanbe helpfulas wellpotentialof shareholdersof the results ofthisstudymayhaveorder to identifythe value of sharesstimulus.
[AlirezaBabaei, Mohammad Babaei, HamedAbdi, MohadesehRezaei. Evaluation the principal components of accounting and its impact on the stock returns of listed companies in Tehran Stock Exchange. N Y Sci J2014;7(7):51-58]. (ISSN: 1554-0200). 8
Keywords: Accounting information, Stock returns, Capital markets
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1. Introduction
One of the main purposesof accounting informationis to assistusersinpredictingthefuturecashinflow entityand consequentlyto predictinvestmentreturns. Some ofthe variablesthat affectthe stock returnin the stock marketare due tothe financialinformationprovidedbythe accounting system. Economic environmentincludesallfactors affectingusers,accounting system andcapital markets.In thisenvironment,all componentscommunicateandinteractwitheach other. One of the advantages ofknowing theeconomic environment is identifyingpotential usersofaccounting informationandprioritizing their needs. Due tomarketas partof theeconomic environment, includingany kindoftaste, so it can beanindicatorofthe amountofdemandforthe information. Thisissue causeda great deal ofresearchin relation tothe marketforceswhich have various affectson it.
Findingsof thisresearchcanbe usedformanagers andinvestors. Asthese findingsformanagerscanmore accuratelyincreasesstrengths and identifyweaknesses ofthe companyunder theleadership(assessment taskmanagementstewardship). Because themanagersof the company's policies and goalsto achieveprofit andgrowthexpectationsare set,the finding of the present study enhancestheir ability tomake more accuratedecisions. In addition, these resultswill help forunderstandingthe main component that has affect onstockholders'equityaccount. Theyalsoparticipatein evaluatingcurrent performanceand predictfutureperformance andhelp whetheritremains stationary orseeks torevisecompany policies. Investorsalsoare able to use theseresultstoidentifyfactors affectingstock returns.
Literature review:
Ineach country, the structure of capital marketshas great influenceon the abilityof managersto affect on the stock price. According to Famapoint of view (1970), inan efficientcapital market, stockpricesfullyreflectall informationis available invarioussecurities. From the perspectiveof Hand (1990), Efficient CapitalMarket Hypothesisisbased on the premisethat investorshavethe abilitytohave enoughinformationin publishedreports andchartsto analyzeaccountingandaccountingthroughaccounting datatoactualcash flowsrealized.Based onTinic perspective(1990), based onthe efficientcapitalmarket hypothesis, stock pricesreflectinformationfrom the financial statementsof accounting.Butthisis trueonly when thesefinancial statementsinclude informationregardingunforeseenchanges infuture cashflowsand thecompany's dividend distributionandit is alsoa sourceofinformationother thanfinancial statementsmentioned inthe market. ThenFoster(1986) and Kothari (2001) statedthat despitethe empirical evidenceonthe efficientcapitalmarket hypothesis, thistheoryhaswidespreadacceptancein the world. Another hypothesis in this context is a mechanical theory of efficient capital markets hypothesis is in line. Thishypothesis isbased onthe capital markets; interesthas focusedon thereport. In other words, the market price of sharesof asinglecompany,according toa company'sprofitis measuredandthe slightestattentionto theaccounting methodsused incalculatingtheprofits. According to Watts and Zimmerman view (1986), anapproach thatissimilar tothe mechanicaltheory, behavioraltheoryisstable. Based on thisapproach,investorslackedsufficient abilityto understandthe actualcash flowsof the company'sfinancial dataarereported. The hypothesisis that thedifference betweenmechanical andbehavioralstability, stability ofinvestment behaviortheoryto thenon-expert investors andprofessionalinvestorsdivides, whileTinic(1990) say thatin bothhypotheses, usingdifferentaccounting methodshavea differentimpactonstock pricesaretheactualcash flows ofthecompany, have the sameeffect. Thenthrough Belkoui perspective(1992), thebehavioralconsistencyhypothesisassumes thata sufficient number ofinvestorscapable of understandingthe nature ofaccounting methodsnotonlysurvivedduetotheprofit andloss(Belkoui, 1992).
A numberofempiricalstudieshave shown thatthe marketis ableto recognizethatyou reallychooseamethod of accountingwithmonetaryconsequencesor not?For example,the view ofDhaliwal (1986), using evidencerelating topensionliabilitiesdue tomarket can bepredicted, even beforethefinancialdebtsifthereare(Dhaliwal, 1986). In addition, based on views of Dukes (1976), Lev and Sougiannis (1996) Aboody and Lev (1998), the market capitalizationof research and developmentexpenditure, the nature of theassets. Although, it's possible that companydecidetotakethese costsas an expensein thefinancial statements. Select thepurchase methodandthe unityof interests indiscussionson mergers and acquisitionsof companieshas beennoticeable. Market behavior and stability of a company purchase method is used to merge the company, the market reaction shows negative goodwill amortization. Studyauthors such as Hong et al., (1978), Davis (1990), Rau and Vermaelen (1998) show thatmarketbehavioris notstableand onlyiftheprofit and lossfiguredoes not care. On the other hand, some studiesfindingsare notinconsistentwith thehypothesis thatbehavioralstability. Jennings et al (1996) and Vincent (1997) have notedthat theratioofbenefit tocost (P/E) less than thepurchase methodofinterestisunity. Andrade (1999) in their studyasignificant relationshipbetweenabnormal returnsandchanges in therevenuerealized thatthechoice between themethodsand composition ofthecompanyof studyis attributable tothesize of thislimitedcommunication. Hand(1990) also presentedanew theory ofbehavioralconsistencybased ontheassumptionthat marketstabilitybehaviorofsophisticatedinvestorsandin fact,whennon-expert investorsare doingstockmarketpricingbehaviorissimilar to thatmarketstability. He alsousesthe theoryof information,stock returnsof companies thathadadopteda policy ofsubstitutingcapitaldebttest.Thestatistical resultsobtainedwere consistentwith the theory(Hand, 1990).
HarrisandOlson(1990) foundevidencethatstock returns arebased ontheevidence; asampleofcompanies in theoil and gas industrycompaniesisclosely linked toitsbook value. In addition, thestudyshowedthatthemarket canreasonablysuccessfuleffortsmethodandthe fullcostingof oil and gascompaniesinexploration expendituresareused todistinguish. The next dissertation research conducted by two researchers on the subject have stated that the relationship observed between the book value and book value of equity or stability can be attributed to investment behavior or not? During the studythey didaboutattributing thisrelationshipstableinvestment behavioron thebook value of theevidenceto obtain. Theyconcluded thatthecarrying valuemay not beessentialfor investors buta stabilizingfactorin thebehaviorof investorsinthe marketdue tolack of experienceand lack ofinformationwasexpressed. Gupta and King, 1997; Waller et al., 1999; Chen andSchoderbek, 2000 opinion is thatwhenmarketparticipantsto gainenough experiencetogetrelevant information onlyon the number ofreported earningsbybusiness unitwillfocus.
Empiricalresearchsuggests thatyetthe behaviorof participants in themarket,whenstock pricesare based onaccounting datato predicttheirpersonalitythatarestablebehavior. Hopkins, 1996; Hirst and Hopkins, 1998; Hopkins et al., 2000 even inthe capital marketanalystswhohave experience andsufficient dataareassumedto bethe rulenotthe exception. Shields and Bitof perspectiveand colleagues(1994), althoughthenumberof reported earningsto shareholdersbehavioralstabilityand the effectonthe marketprice ofthe sharesistheincentivefor companiesto selectspecificaccounting methods, does not provide. Luft(2001) conducteda trialontheissue ofwhetherpeople arespendingonintangible, emphasis on capitalexpendituresorturnthemoffas thecost ofpeople think. Beattie et al, 1994 althoughthenumberof reported earningsto shareholdersbehavioralstabilityand the effectonthe marketprice ofthe sharesistheincentivefor companiesto selectspecificaccounting methods, does not provide. Howevercausesadministrators torealizethatfinancial reportinghas an impacton stock price.
Mayer-Sommer, 1979; O’Keefe and Soloman, 1985 wereof the opinionthatmanagersare notfully convincedthatduetothe efficiency ofcapital markets. Kothari (2001) statedthat, although the empirical evidencedoesnot provideaconvincingaboutthe marketis notefficient,butthere isa strong evidence showthatmanagersbehaveasthoughthe marketis focusedonearningsreports. For example, thechoice betweenthe purchase methodandthe interestsof unity, the stock market prefers touse thebenefitsofthe union, because theunionbenefitshave a positive effectmethodwillresult in apositive effectonincomeisstock prices. Thepricing foreducation,corporateand unioninterestsaffected bythe choiceof procurementmethodis.Empirical evidenceshowsthebenefitoftechniquesused inAlliance; study participantsare payingmore moneyforeducation.
Based on Nathan, 1988; Robinson and Shane, 1990; Lys and Vincent, 1995; Ayers et al., 1999 view, when thedirectorsbelievethatthefinancialmarketsare focused, more interestearningsmanagementthe use ofappropriate accountingmethods.
Beattie et al, 1994; Leuz, 2003 expressed the viewthatbased onthe useofearnings managementbya company, influenced bythe characteristics ofthe business environmentinthecountry where thecompanyoperates. Incountries withdevelopedcapital markets, the corporatestructure ofadistributed(decentralized), this powerfullawfirms, investors and powerlawstend toreduce thepoliciesof the earnings management. Jun, Sang et al, 2002 study examinestherelationship betweenliquidity andstock returns. In thisstudy,the relationship betweenliquidityandstock returnsusingtime seriesanalysiswere examined. Resultsindicatea significantpositive relationshipbetweenstock returns andliquidityratios.
Bartholdy (2002) study showed thatfinancial ratiossuch aspricetoearnings, book valueandmarket valueare includedinthe prediction ofstock returns. Lam(2002) to explain stock returnsinHong Kongfromamultivariate regression modelwasused. Heconcluded that theexpectedpositiverelationship between stock returnandmarket value ofthe company, also found that theratio ofbook valueto market valueishigh powerto explainaverage returns. Therelationship between theratio ofbook valueto market valueandreturn on equitywas negative.
Dimitropoulos and Asteriou(2009) in astudyentitled"Communicationwiththefinancial statementsandtheir impacton stock prices," asurvey of101companies listed inthe AthensStock Exchangeandtheeffect ofa10-year periodat the same timeaccruals, earnings per shareanda specialsix-ratio as an indicator ofstock pricemanipulation inthefinancial statementswerereviewed.
Namazi et al., study(2006) in examining the relationshipbetweenfinancial ratiosandstock returnsacceptedcompaniesinTehran Stock ExchangeUsing the informationneededfor the period1999-2003was performed. Toverify thehypothesis,research, andcross-time data integration methodis used. The resultsof thereviewof allcompanies andindustries,a separatesurveyindicatedthat it was of all thefinancial ratiosandstock returns, there is a significant relationship. Thus, all hypotheseswere confirmedin thestudy.
Karami et al., study(2009) showed analysis ofthe role offinancial ratiosin explainingstock returns, using information fromlisted companiesinTehran Stock Exchangeduring 2000-2006has been carried out. Inthis study,fourgroupsoftwelvefinancial ratios, liquidity ratios, leverage, activityand profitabilityhavebeen studied. Thehypothesisofthis study,we usedamultivariate regression modelthatsimultaneouslyexaminesthe relationship betweenfinancial ratiosand stock returns. The results ofthis studyindicate thatthecurrentratio, debttoyou, return on equityand profit tosales, there is a positiverelationwithstock returns. Based on thefindings, thesefinancial ratiossmall percentageof the variation instock returns,the figureturns.
Salehnejadet al. research(2009) showed theeffect ofthe rate of returnon assetsandreturnon equityand leverageTehranStockExchangelisted companiesbyenhancingthe financialinformationfor the period1999-2004, 97 participantsperformeda cross-sectionalaccepted. However,thehypothesisofmultivariate regressionmodelsand modeldelayvariationsinglobalsurfaceand separatecompaniesindifferent industriesaretest. Results ofhypotheses testingshow thatthe overalllevelofparticipationratios forROE and ROAis effectiveonthe stock price. Butnosignificanteffect offinancial leverage is reported.
IbrahimI andSaidiResearch(2010), in examining the impact ofaccounting variablesandfirmcharacteristicsonstock pricesof companieslisted inTehran Stock ExchangeUsing data from92companiesfor the period2001-2007. Accounting variablesexaminedincluded thebook valueper share, return onassets, assetturnover, and operating cashflowper shareandearnings pershare. Firmcharacteristicsexaminedincludeprior periodstock price, size and duration oftheactivity. Themaximum likelihoodestimationmethodforpanel datawithrandom effectsandhierarchicalmethodis used. The resultsshow that thethree variablesbetweenstock priceandearnings per sharereturn onassetsand stock priceof the previous period, there is a direct relationship andvariablesandoperating cashflowper share, forthe company andasset turnoverratiosdo not influencethestock price, butthecompany'sstock priceand sizeareinversely.
Research Questions
Research on factors that increase the value of a business unit and its aftermath led to an increase in shareholder wealth to be focused. Alsoin thisstudy,particularlyonthe financial statementitemsthathavean impacton thestock valueof abusiness unitis focused. The mainresearchquestionsare:
1)Do investors pay attention to theequitywhenthey wantto evaluateanentity'saccountingdata or not?
2)Whichpolicies andstrategiesrelating to theoperations,working capitalmanagement andbusiness unitsaffect?
Research Hypotheses
According tothe researchobjectives,theoretical foundations, theresearchhypothesesare statedas follows:
1)There is a significant relationshipbetweenindicatorsto assessthe operationalmanagement policies(rate of return on sales,assetturnoverrate of return onassets,financial leverage, and returnon equity, profit marginbefore interest andtaxesand depreciation) and the rateof return on equity.
2)There is a significant relationshipbetweenthe evaluationcriteriaof investmentmanagement(working capital turnover ratio, turnover ratioInventories) andstock return.
3)There is a significant relationshipbetweenindicatorsof financialmanagement assessment(current ratio) andstock return.
Research Variables
OperationalManagement
An indicator to assess the operational management includesthe followingratios:
- Rate ofreturn onsales(ROS):Thecorrelationbetween therelativeprofitability of the company's operational activities,particularlythe company's abilityto obtainany footageshows mechanismsofbenefit.
- Assetturnover(AT):This ratioshowshowefficientlya company, has appliedto increase the saleof theirassets. This ratioindicateswhethera companyisparticularlyconcerned withthe achievement ofthesales, the investment is too much or not?
- Rate ofreturn onassets(ROA):This ratioindicatesa company'sability to makeinvestmentsthatRLShasa fewrials. This ratiocanbe obtainedfrom themultiplication oftwohigh proportion (ROA=ROS×AT).
- Financialleverage(FL):This ratioindicatesthat thecompany's assets through multipleIRRofthe investmentare achieved.
- Rate ofreturn on equity(ROE):This ratioindicates acompany'sprofitabilityin the use ofresources investedby theshareholders.Thisratiomultiplied byfinancial leverageand ROAis achieved (ROE=ROA×FL).
- The proportion ofprofit marginbefore interest andtaxesand depreciation(EBITDM):This ratioisan indicatorofthe operating performanceof theCompanydivided byearnings beforeinterest,taxand amortization expenseon salesachieved.
Investment Management
Investmentmanagementcanbe evaluatedthroughthe followingratios:
- Working capitalturnover ratio(OWCT):This ratioindicates thatfor everyoneriyalcapitalsellingsomeIRRis achieved.
- Inventoriesturnover ratio(IT):This ratioshowshow mucha companyhasuseditsworking capital.
Financial Management
Financial managementby thecurrent ratio(CR)is measured. Theodds ratioforassessing thecompany's liquidityandabilitytorepaycurrent liabilitiesprovides. It is assumedthat themagnitudeof this ratioindicatesthat the probabilityis lowthat the companyisfacingliquidityproblems.
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Variable / Symbol / Calculation methodRate of return onsales / ROS / rate of return onsales= net profit /totalsales
CurrentRatio / CR / CurrentRatio= Current Assets/Current Liabilities
Assetturnover ratio / AT / totalassetturnover ratio=total Sales/ total assets
Financial Leverage / FL / financial leverage= total assets/equity
Ratio ofEBITmarginbeforeinterest, taxand amortization / EBITDM / EBITDM= EBITEarnings beforeinterest, taxand amortization/total sales
Working capitalturnover ratio / OWCT / ratio ofcapital= total sales/ Working capital(current liabilities-CurrentAssets)
Inventoryturnover ratio / IT / Inventoryturnover ratio= costof goods sold/Totalinventory
The ratio ofmarket valuetobook value ofequity(growth control variablefirm) / MV/BV / MV/BV= value ofequity/value ofshares
Research limitations
To select a samplesurvey, the following were considered:
1)Thefinancialyear endis29 Esfand (20 March).
2)Companies in theperiod2006-2010haveconsistentlyexchangeactivities.
3)There isfullinformation of companies.
4)Insurance companies, investment banks.
5)Companies withat leastonefinancialyear, endingMarch2006-2010.
6)Companies thathave reported anoperating loss
Totest thehypothesismodel(1) isexplained:
Model(1)
Usethe followingmodeltoexaminestock returnswith respect tothe independent variablesweanticipated.
SRi,t = b0 + b1ROSi,t + b2 CURRENT RATIOi,t + b3 ASSET TURNOVERi,t + b4 FINANCIAL LEVERAGEi,t
+ b5 OPERATING WORKINGi,t + b6 INVENTORY TURNOVERi,t + b7 EBITDA MARGINi,t +b8
MV/BVi,t + ei,t
Stock returns (SR) is the dependent variable, the model is calculated.
SRt = (Pt + Dt –Pt-1) / Pt-1
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Inthisequation, SRtis daily stockreturnsandPtis stock priceonthe lasttradingday and Pt-1 is stock priceon the day before and Dtis Dividendpaymentslast year.
Research Methodology
Themodelsusingstatisticaldataare dividedinto threegroups.Some modelsuse the"time series" or in other wordsa relativelylongperiodof several yearscan beestimated. Othermodelsbased on"data point" toestimatethevariables ina given time period, say aweek,amonth orayear in thedifferent unitsare examined. A thirdmodel, which isalso usedinthisresearch, estimationsbased on"panel data". Inthis way, aseries ofcross-sectionalunits(egfirms)areconsideredinthe past fewyears. Given thatthe mergedobservationslead togreatervolatility, lessamongthe explanatory variables, moredegrees of freedomto estimate thetotalefficiencyishigher, relative topanelstudiesandtime-seriescross-sectional studieshavethe advantage (Baltaji, 1995).
Financial RatiosdatafirmsinTehran Stock Exchange forthefinancial statementthatis accessiblethrough the applicationof innovativeoutcomes, has been achieved. Companies' stockpricesto calculatestock returnsare obtainedfrom thesite ofthe Tehran Stock Exchange. Thecollected dataintoExcelSoftwarepagerangeandpreliminarycalculations,the variablesinthis applicationhas been made. After calculatingvariablesforfinal analysisEviewssoftwareis used.Alsosuitable forexaminingthe statistical methodsemployed andbetterHausmantestandFbound.
Ftest ofthe hypothesisto beboundby the followingexpression:
InthistestthehypothesisH0againstthe hypothesisH1be the samewidth, the origin of thedifferenceis placedacrosstheorigin. If thehypothesisH0is accepted,theleast-squares method iscommonly used,butif yourejectthe hypothesisH0is acceptedusingpanel dataandpanel datamethodscanbe used tointercepteffects. In order todeterminethe typeofintercept(fixed or random) Hausmantestis used.Hausmantest ofthe null hypothesiswould beas follows:
InthistestthehypothesisH0againstthe hypothesisH1be the samewidth, the origin of thedifferenceis placedacrosstheorigin. If the hypothesis H0 is accepted and commonly used method of least squares, but if you reject the hypothesis H0 is accepted using a panel data and canbe used tointercepteffectspaneldata approach. In order todeterminethe typeofintercept(fixed or random) Hausmantestis used.Hausmantest ofthe hypothesiswould beas follows:
Ifaccepted,H1 (reject H0)methodfixed effectsas well astheinclusionH0 (reject H1), we use thefixed effectsmethod.
In model (1) to the problem of correlation between the independent variables, two independent variables of the model have been removed, the rate of return on assets (ROA) and return on equity (ROE). Table(b) shows thedescriptive statisticsforthe studyvariables.
Tehran Stock Exchangeofspatialrealmsandterritory, 2006-2010.The study populationincluded 126companiesinTehran Stock Exchangeandthe sampleare companies thatare chosenas follows:
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Description / No.Alllistedcompaniesaretradedon the Stock Exchangesince85 to89have been evaluated / 393
Deduction: Companiesare dismissedoracceptedfrom85 yearsand after / (118)
Companies thathave been activesince2006-2010instock / 275
Deduction: insurance companies, investment banks / (31)
Companies thathave been activesince2006-2010instock, after deductinginsurance companies, investment banks / 244
Deduction: Companies thatat leastonefinancialyear, from 85 to89to the end ofMarch / (54)
Deduction: Companies thathave reported anoperating loss / (64)
Number ofstatistical sample / 126
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Research Findings
Toexamine thehypothesisthat examines therelationship betweenstock returnsandaccountingrates ofpay, the model (1) using a least squares regressionis atestpanel. For this purpose, the F test is used to bind the results in Table (a) is shown.
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F BoundTest
Table(a)
F Bound TestTest / Statistics / Statistics value / df / P value / Data Type
Chow / F / 1.483833 / 125494 / 0.002 / Panels with the effects ofthe intercept
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According tothep-value,assumingH0is rejectedat the95% significance level, assuming H1,iethe interceptdifferenceis accepted.
Hausman Test
Todetermine theeffectsofthe interceptof theHausmantestis used totestthe resultsinTable(b) is shown.
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Table(B)
Hausman TestTest / Statistics / Statistics value / df / P value / Type of effectsofintercept
Hausman / Chi-Sq / 69.122 / 10 / 0.000 / Fixed effectsintercept
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According to the p-value, assuming H0 is rejected at the 95% level and the assumption H1, the fixed intercept will be accepted.
According tobindF-test and Hausman, panel dataregressionwithfixedeffects,intercept, model,least squaresinTablepanel(c) is presented.
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Least squaretest
Table(c)
- The estimatedmodel(1) using ordinary least squarespanelmodelwith fixed effectsforintercept
EvaluationIndex / Variable / Type ofRelationship / Significant / Accept or reject thehypothesis
OperatingManagement / ROS / Reverse / Non-significant / Reject
ASSETTURNOVER / Direct / significant / Accept
EBIT DAMARGIN / Direct / Non-significant / Reject
FINANCIALLEVERAGE / Direct / Non-significant / Reject
Investment Management / OPERATINGWORKING / Reverse / Non-significant / Reject
NVENT ORYTURNOEF / Reverse / Non-significant / Reject
Financial Management / CURRENTRATIO / Reverse / Non-significant / Reject
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Conclusion:
Inthisstudy,the relationship betweenstock returnsof listed companies inTehran Stock Exchangeandvariables definedin thecourse ofthefinancial information oftheCompanyfrom2006-2010wasanalyzed.