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1 An Investigation of the Role of Financial Reporting Quality in Relation to Reducing the Impact of Dividend Policy Imposed on Investment Decisions (Accepted Companies in Tehran s Stock Exchange) * Amin Mehrpisheh Islamic Azad University, Bandar Abbas Branch, Bandar Abbas, Iran *Corresponding Author Hamidreza Vakilifard Islamic Azad University, Science and Research Branch, Tehran, Iran Abstract Investment can be known as one of the fundamental pillars of any country s economy. There is no doubt that the increase of production as one of the first steps in the development process, will require to increase investment, in our country also, with the expansion and development of the capital market which the stock exchange is at the head of it; a significant portion of the assets of investors is in the frame of the shares of accepted companies of stock exchange, one of the most important factors influencing the decision making in relation to investment within a country, is the rate of company's profit sharing, thus in this investigation, the role of financial reporting quality has been investigated in order to reducing the impact of dividend policy imposed on the investment decisions of accepted companies listed in stock exchange of Tehran. A sample includes 78 companies that have been accepted in stock exchange of Tehran between the years of Hypotheses have been tested based on the Shapiro Wilk, F Limer and Hausman tests and multivariate linear regression. The dividend policy is the independent variable in this study and the dependant variable is conducted for investment research and also the moderator variables of this investigation are the quality of financial reporting and growth opportunities. The results indicate that the impact of profit dividends on investments is less negative, in companies with a higher quality of financial reporting compared to companies with a lower quality of financial reporting, with constancy of other conditions and also the predicted assumption for first hypothesis is less for companies that allocate some parts of the company s value for growth opportunities. Keywords: the financial reporting quality, dividend policies, investment, growth opportunities. Page 1

2 Introduction and Problem Statement One of the most important factors influencing the decision-making in relation to investment in a country is the division of the company s profit division. Therefore, investors pay a close attention during the decision making of the division of the company s dividend policy. So considering the major factors that affect the division of the profit, have high importance so in this way investors could consider the factors and the effect of them, in connection with its investment plan and to achieve a high investment risk. In the recent years, due to the crisis and financial scandals, a number of large companies such as Enron and World Com have decreased public confidence in financial reporting and have made the requirement of the implementation of mechanisms in order to improve the financial reporting tangible. These conditions led to a higher demand for greater information transparency and financial reporting of companies that some people expressed they lose confidence in the capital markets because of multiple frauds due to false financial statements or bankruptcy. (Pie et al, 2014) the quantity, quality and timeliness of information disclosed by the corporate governance, are one of the most important tools for decision-making by investors. When the information is available to the public through corporate governance, this information are evaluated and analysed by traders, investors so to decide to buy or sell shares. The way the investors deal with the information and their decisions have impact on the volume of supply and demand or to a depth market offers of purchase and sale prices and form them (Kashanipour et al, 2010) accountants as a knowledge-oriented audience, have the responsibility of providing useful information to consumers, also make informed judgements and decisions. Accounting system is process that with the task performance assigned to it, which is known as the communication loop between economic entities and organizations with the surrounding environment. The surrounding environment includes a broad set of users that is somehow linked with the economic unit and this communication can be direct or indirect. Accounting s common goal is providing useful financial information for financial contacts. Disclosure is declared as one of the accounting principles and on the basis of this principle, all information on company activities should be available to different groups of users properly and timely (Parchin, 2009). Financial reporting plays important role in reducing the limited or negative effects in investment. Financial reporting with its high quality reduces the information asymmetry by providing more information about the projects of investors in the company, as a result, the negative selection will be reduced in the issuance of securities. The quality of financial reporting was always considered by the current and future investors. Based on the recommendation of the Blue Ribbon Committee in 1991 on the need to evaluate the quality of accounting principles used in the preparation of Financial Statements, AICPA (AICPA) in 2000 attempted to provide clear definition of quality. So they defined quality as: "the objective criteria to help the steady assessment of accounting principles used in preparing the financial statements of a single unit". According to the Statement No. 37, Financial Accounting Standards Board, financial reporting provides information that can help potential investors to assess the value amounts, timing and uncertainty of future cash receipts. So the measurement of accruals is used as the indicator for the quality of financial reporting. Based on this view, accrual improves valuable benefits by reducing fluctuations in unstable cash flow. Also, one of the influential factors on the quality of financial reporting, is the increase of the dividend yield and therefore the higher the dividend yield the higher the quality of financial reporting. Page 2

3 This study is conducted to investigate the role of financial reporting quality in reducing the profit divided policy incorporates in the decisions of their investments. In particular, we discuss that whether the assessments of the financial report with high quality reduces the limited effect of dividends to investors or not, and does financial report with high quality reduce the negative effect in investment. Hypotheses of Research 1. The impact of dividends on the investments is less negative in companies with a higher quality of financial reporting toward companies with a lower quality of financial reporting through the constancy of the conditions. 2. Predicted effect in first theory is less for companies that allocate some parts of the company's value for growth opportunities. Background Research The results of Mahmoodabadi and Rezaei research (2013) showed that there is a significant negative correlation between earnings management and both voluntary and involuntary quality of accruals (quality of financial reporting). The results of the research of Sajjadi and Zarezadeh (2011) showed a significant relationship between bonus payments to managers with the economic criteria of the assessment of the performance such as value-added economy, market added value and economic adjustment value-added. The study results of John Johnny (2013) showed that companies with high quality earnings acquire positive returns and companies with low quality earnings acquire negative returns in a way that the companies with the highest quality could acquire earnings in study period, 17% more than the lowest earnings quality of companies that have their business efficiency. The research of Chuan-San Wang et al (2012) showed that the full market capitalization dividend policy does not affect investment decisions. While inimperfect markets, limitations of foreign funds that arises from information asymmetry may be dropping the company to investors of the value of the projects. The financial reporting significantly reduces the negative effect of dividends on investors, especially in the research and development of the investors. Rajgopal Vonkatachalma (2011) investigated the relationship between the quality of financial reporting and volatility of stock returns, they concluded during the investigations that in the period of 1962 until 2001, the loss of profit volatility of stock returns will be increased. Ayatiridis, (2011) in a research investigated the disclosure of accounting, conditional and unconditional conservatism and accounting quality. His findings showed that companies which have the purpose of the higher disclosure, accordingly have the higher profitability and cash. Companies in which have changed their managers and have been examined and accounted by one or one of the big four audit firm, and have the higher disclosure quality. Results of Biddle et al (2009) showed that the quality of financial reporting is much more associated with the less investment, it means that there is causal relation between financial reporting quality and investment efficiency, and there is a significant relationship between the quality of reporting and less and much more investment. Page 3

4 Vishwanathand Kaufman (1999) believe that the clarification means the timely increase of flow of the economic, Social and political information, which should be available for all relevant stakeholders. On the contrary, the lack of transparency of the information to prevent the access to information or providing incorrect and correct information or disability of the business market to ensure the sufficient factor and is defined by the relevance of the information provided that the individual. Research Methodology The presented research is a functional and correlational study. The statistical populations of the investigation are the all accepted companies in Tehran Stock Exchange from 2007 until 2013 that have been active in exchange. Table 1: Sample choice The total number of all accepted companies during the study period 364 Deduction: The number of companies that have not been active during 2007 to (119) 2013 in stock exchange The number of companies that their financial year ended to the end of (70) March or during the study period have not been Changed in financial year The number of companies that were in the group of (55) Investment or financial intermediary or holding companies Number of company samples 120 The independent variable of this study is profit dividend. Moderator variable, is the quality of financial reporting. To measure the quality of financial reporting was used from model Dichev and Dechow(2002) which is the regression of capital in the flow of accruals(verdi, 2006) and the dependent variable, investment, finance research and development, investment funds and control variable, financial leverage, firm size. In order to test hypotheses was used of regression analysis based on the statistical model which are as follows. The effect of dividends on investment earnings quality was tested with virtual variable. Relationship (1) Cost of equity jt = β 0 + β 1 EPS jt + β 2 (G 1 EPS) jt + β 3 (SIZE jt) + β 4 BM jt + jt In this study, to collect data and information, the library method has been used. The early data to calculate these variables was evaluated through the Tehran Stock Exchange website and Software of Rahavard and NovinEstekhraj software and will be calculated and processed after transferring to a spreadsheet EXCEL and then Cost of equity j.t = according to the hypothesis, the data analysis and hypothesis testing from regression analysis will be used by the application of STATA Version Page 4

5 Research Findings A) Descriptive Results of Research In the first part, the most important indicators of central and dispersion variables of the study are provided. Table 2 statistic Descriptive Variable Symbol Minimum Maximum Average Standard deviation Capital Share investment 0/087 0/745 0/364 0/482 Debt level DEBT 0/ size of the SIZE 9/ company Sales growth bm 0/ Dividend profit div Quality reporting g /49 According to descriptive statistics, dispersion index of these variables in different companies is low. The highest standard deviation is related to dividends variable and lowest standard deviation is related to sales growth variable. B) Analytical Findings 1. The Test of first Hypothesis of Companies with Low Reporting Quality H 1 : The impact of dividends on the investors investments is less negative in companies with a higher quality of financial reporting toward companies with lower quality of financial reporting, with the constancy of other conditions. Results of Table 3 represent the optimal model for testing the hypothesis. Due to the positive relationship between adjustment and investment, the first hypothesis has the effect of dividend on the investment is less negative, companies with a higher quality of financial reporting toward companies with lower quality of financial reporting, with the constancy of other conditions. Page 5

6 Table 3: hypothesis testing Investment it = β 0 + β 1 Div it + β 2 G it + β 3 SIZE it + β 4 DEBT it + β 5 G it + B5 G * DIV it + B6 BM it + ε it Significant level. Statistics z Factor Symbol Variable /192 Div Dividend 0/0 00-3/ DEBT Debt 0/ /194 SIZE size of the company /255 BM Company growth 0/0278-2/572-0/172 G Quality reporting G * DIV Quality reporting *dividend 031/ C Intercept 14/51 Wald statistic 0 / 000 Significant level Adjusted determination coefficient 2.28 Watson camera 4.6 Testing of the Second Hypothesis H 1. The predicted effect in first theory is less than other ones for companies that allocate some parts of the company's value to growth opportunities. Results of Table 4 represent the optimal model to test the hypothesis. Due to the positive relationship between adjustment and investment of predicted effect in first theory is less than others for companies that allocate some parts of the company's value to growth opportunities, so the second hypothesis is confirmed. Page 6

7 Table 4: Hypothesis II Testing Investment it = β 0 + β 1 Div it + β 2 G it + β 3 SIZE it + β 4 DEBT it + β 5 G it + B5 G * DIV it + B6 BM it + ε it Significant level Statistics z Factor Symbol Variable Div Dividend DEBT Debt SIZE size of the company /017 BM Company growth /04 Grow Growth opportunities Grow * DIV * Dividend growth opportunities C Intercept 36/127 Wald statistic Significant level Adjusted coefficient of determination 23/2 Watson camera Discussion and Conclusion The results of the test hypotheses by using data on the companies listed in the Tehran Stock Exchange during 2007 to 2013 shows that: First hypothesis: the effect of dividend on the investments is less negative in companies with a higher quality of financial reporting toward companies with lower quality of financial reporting, with the constancy of other conditions. Due to the positive relationship between adjustment and investment in the first hypothesis, the effect of dividend on investments, is less negative in companies with a higher quality of financial reporting toward companies with lower quality of financial reporting, with the constancy of other conditions that has been confirmed. In conclusion it can be said that companies can increase the quality of financial reporting through which investors draw attention to it and there should not be any need for consuming the resources of the company to undertake dividend policy rather than investing in the projects which are not profitable, these results are consistent with the findings of Wang et al (2013). Page 7

8 Second Assumption: the predicted effect in first theory is less for companies that allocate some parts of the company's value to growth opportunities. According to the results, the dividend variable as the independent variable due to its confidence level (0.0217) has significant negative relationship with capital variable. These results are consistent with findings of Wang et al (2013). Chuan - San Wang et al (2012) in a study investigated that the full capitalization market of dividend policy has not an impacts on the investment decisions. In imperfect markets, limitations of foreign funds that arise from information asymmetry can force company to ignore the valuable investment projects. The financial reporting with a high quality significantly reduced negative effect of dividends on investments, especially in the research and development of the investments. Page 8

9 References Biddle, G., and Hilary. (2006). "Accounting quality and firm-level capital investment ", The Accounting Review, vol.81, pp John Johnny Reza, Khodadivali Examining the relationship between income and its components with emphasis on quality profits and stock returns of companies listed in Tehran stock exchange -the title of the publication: Financial Accounting: Spring 2011, Vol. 3, No. 9; from page 84 to page 113. Iatridis, G Accounting disclosures accounting qualit y and conditional and unconditional conservatism. International Review of Financial Analysis 20 (2) (Apr): 88. Mahmoodabadi, Hamid and Gholamreza Rezaei, (2012), "investigating the Earnings Management Effects on Financial Reporting Quality of Listed Companies in Tehran Stock Exchange ", the first regional conference on new approaches to accounting and auditing, Islamic Azad University Bandar Gaz Branch Parchini Parchin, Mahdi. (2009). The Relationship between voluntary disclosure and the independence of the board. Master s thesis. The University of Mazandaran. Rajgopa, Shiva. Venkatachalam, Mohan, (2011), "Financial Reporting Quality and Idiosyncratic Return Volatility", Journal of Accounting and Economics 51 (2011), PP Sajadi, SeyedHasan; ZarezadehMehrizi, Mohammad Sadiq, (2011) examined the relationship between executive compensation plans and economic criteria for evaluating the performance of the listed companies in Tehran Stock Exchange, the Financial Accounting Research, Volume 3, Number 4 Vishwanath T., D. Kaufmann, Towards Transparency in Finance and Governance, Working Papers of the World Bank, Wang C, Ramalingegowda S, Yu Y, (2013) "The Role of Financial Reporting Quality in Mitigating the Constraining Effect of Dividend Policy on Investment Decisions" The Accounting Review, Volume 88, Issue 3 Page 9