RELATIONSHIP BETWEEN FREE CASH FLOWS AND DISCRETIONARY ACCRUALS IN TEHRAN STOCK EXCHANGE

Transcription

1 RELATIONSHIP BETWEEN FREE CASH FLOWS AND DISCRETIONARY ACCRUALS IN TEHRAN STOCK EXCHANGE Reza Gharari 1 Deparmen of Accouning, Kish Inernaional Branch, Islamic Azad Universiy, Kish, Iran Mohammad Hassanzadeh Mohaghegh Ardabili Universiy, Ardabil, Iran Absrac In he presen sudy, an aemp has been made o examine he relaionship beween free cash flows and discreionary accruals in Tehran Sock Exchange. Since he ime of public release of financial informaion impac on he research resuls and he fac ha he financial year of mos companies lised in Tehran Sock Exchange ended March ends, so all he companies lised in Tehran Sock Exchange, form he research populaion. Due o he exen of he populaion and exisence of some inconsisency among he members of sociey, hen he necessary resricions was seleced he saisical sample. Companies whose heir price is below he nominal value, may have a good performance bu even so are no a aenion of marke, so hese companies were no suiable for he purposes of he presen sudy and were excluded from he sample. Afer doing menioned resricions 63 companies were chosen as he saisical sample in which he observaion period of he sudy in 315 seleced companies was exraced and was used o analyze of he sudy. To collec he daa, he library approach is used. Informaion required by he New Deal and sofware Tehran Sock Exchange sie collecion, daa analysis was performed using sofware SPSS. Findings show ha he research is approved so ha free cash flows have meaningful effec on discreionary accruals. Keywords: free cash flows, discreionary accruals, Tehran Sock Exchange Inroducion Naurally, all individuals have been looking for increasing heir wealh in order o maximize heir benefi, securiy and so on. This endency escors hem o look for suiable opporuniies in order o maximize heir wealh by he invesmen. Noneheless, here have been individuals who are unable o manage heir own properies o make profi, so hey have o employ ohers o do his ask behalf of hem. 1 Correspondence auhor 1

2 Operaing cash flows on cash flow saemen indicae firm's abiliy o produce cash flows. However, mos of financial analyss argue ha cash flows from operaing aciviies are funds ha no only should be invesed in new fixed asses o enable firms o keep curren level of operaing aciviies, bu also a proporion of ha fund should be disribued as a dividend or sharerepurchase o saisfy sockholders. Therefore, cash flows from operaing aciviies, on is own, can' be considered as a firm abiliy o produce he cash flows. Jensen (1989) was among he pioneers who inroduced free cash flows heory and presened a definiion for i. In his view, free cash flows is defined as he cash from operaing aciviies afer deducing he necessiy cash in order o he invesmen in posiive ne presen value projecs. However, projecs should be measured regarding o ne presen value hrough applying a reliable cos of capial; if he resul is posiive, he necessiy cash for he invesmen deduc from firm's available cash, whaever remains will be considered as free cash flows. According o Len and Poulsen (1989) free cash flows is operaing income before depreciaion expense afer ax, ineres expense and preferred and common sockholders' dividends. Also, Copeland e al (2005) defines free cash flows as he operaing income afer ax plus non-cash expenses afer deducing he invesmens on working capial, propery, plan, equipmen and oher asses. According o Dechow and Ge (2006) free cash flows is he cash flows from operaing aciviies plus he cash flows from invesmen aciviies. In oher words, FCF is he resources available for managers o inves, bu ha oherwise could be disribued o he shareholders. For Bhundia (2012) and Jensen (1986), one of he greaes agency problems is he allocaion of he free cash flow. According o Jensen (1986), he conflics of ineres beween shareholders and managers over he dividend payou policy is especially severe when he organizaion generaes large free cash flows. This is refleced in he problem of how o moivae managers o increase dividends insead of making invesmens wih reurns below he cos of capial or wasing cash hrough inefficiencies. Bhundia (2012) saes ha he operaing cash flow disclosed indicae he firm s capaciy o generae resources. He furher commens ha he operaional cash flow should no be used only for acquisiion of new asses o allow he company o mainain is curren level of aciviy; par of i should also be disribued as dividends. This siuaion of opposing uses generaes an agency conflic beween shareholders and managers. According o Dechow, Ge & Schrand (2010), nondiscreionary accruals resul from adjusmens necessary o reflec he firm s performance, while abnormal (discreionary) accruals are hose ha capure disorions induced by he accouning sysem or ha resul from earnings managemen. There is a general view ha if he normal componen of accruals is properly modeled, hen he abnormal componen of accruals has worse qualiy, so i impairs he overall qualiy of he informaion provided by earnings. Corroboraing his view, Subramanyam (1996) affirms ha discreionary accruals do no occur because of inefficiency of he marke, bu insead due o he fac ha managers use accruals o smooh revenues and improve he persisence and predicion of earnings. He also suggess ha o sudy earnings i is necessary o examine is componens, namely accruals and cash flows. Chung, Firh & Kim (2005) found ha firms wih excess FCF end o use discreionary accruals o increase he announced earnings. This fac is consisen wih he hypohesis ha managers use DAs o camouflage he impac of invesmen projecs wih negaive NPV. Bhundia (2012) also found his resul. However, Opler & Timen (1993) sressed ha firms wih high growh end o have lower FCF, since he money is used on projecs wih posiive NPV. I can hus be inferred 2

3 ha a relaionship exiss beween he amoun of FCF and he propensiy of firms o manage heir earnings by means of discreionary accruals. In he presen sudy, herefore; an aemp has been made o examine he relaionship beween free cash flows and discreionary accruals in Tehran Sock Exchange. Mehodology Since he ime of public release of financial informaion impac on he research resuls and he fac ha he financial year of mos companies lised in Tehran Sock Exchange ended March ends, so all he companies lised in Tehran Sock Exchange, form he research populaion. Due o he exen of he populaion and exisence of some inconsisency among he members of sociey, hen he necessary resricions was seleced he saisical sample. Menioned condiions are: 1. Companies ha are presened he necessary informaion for conduc research in he period 2010 o 2014 in full. 2. The financial year of company has no changed during he years 2010 o The financial year of company ended o he end of March. 4. Companies whose share prices are no below he nominal value. 5. Company sock rading is consanly carried ou in Tehran Sock Exchange and rading sop was no happened for over a monh in he menioned sock. 6. No o be invesmen companies. Companies whose heir price is below he nominal value, may have a good performance bu even so are no a aenion of marke, so hese companies were no suiable for he purposes of he presen sudy and were excluded from he sample. Monhly reurns disribuion of companies ha are no available daa on heir reurn more han wo-monh, his was no saisically reliable because hose companies were excluded from he samples. Afer doing menioned resricions 63 companies were chosen as he saisical sample in which he observaion period of he sudy in 315 seleced companies was exraced and was used o analyze of he sudy. To collec he daa, he library approach is used. Informaion required by he New Deal and sofware Tehran Sock Exchange sie collecion, daa analysis was performed using sofware SPSS. The research model: By he following model he linear relaion and muliple informaive is calculaed wih he profi predicabiliy and disclosed qualiy. DA i, 0 1X i, 2SIZEi, 3INTEXP i, 3

4 Findings In his paper we have one main hypohesis. The saisical way of analysis of hypoheses is wo ways, H 1 is accepance of hypohesis and H 0 is rejecing of hypohesis. In oher words, i means ha H 1 has posiive meaning and H 0 has negaive meaning. The hypohesis1: here is a relaionship beween free cash flows and discreionary accruals. H 0 : here is no relaionship beween free cash flows and discreionary accruals. H 1 : here is relaionship beween free cash flows and discreionary accruals. According o he regression es his issue invesigaed and he resuls have come in able 1. Bu prerequisie of regression es is ha he daa should have normal disribuion. For invesigaion of his issue we used Kolmogorov-Smirnov es which is resuls have come in able 1. Table 1: Kolmogorov-Smirnov es Variable Kolmogorov-Smirnov P-Value DA FCF Since he possibiliy amoun is bigger han 0.05 and saisical number is for DA and for FCF, hypohesis H 0 based on daa normal disribuion, due o available documens, can be rejeced. So i can be claimed ha beween he disribuions of variable free cash flows and discreionary accruals normal disribuion. Table 2 show he resuls of correlaion coefficien beween free cash flows and discreionary accruals Table 2: Resuls of Correlaion coefficien beween variables n 315 p Correlaion coefficien r free cash flows and discreionary accruals According o Table 2, he correlaion beween free cash flows and discreionary accruals in he p 0.01 has been significan, so here is a coefficien relaionship beween free cash flows and discreionary accruals a Tabarok and Delpazir companies in Ahvaz Ciy. We can rejec H 0 and acceped H 1 hypohesis wih 95% confiden. Now, using regression es, we are esing he firs hypohesis which is resuls have shown in ables 3 o 5. Linear regression is one he saisical echnics which is used in predicing he amoun of dependen variable according o he amoun of independen variable. When he sandardized regression coefficien is more, we can conclude ha independen variable has more influence on dependen variable. The resuls of regression have come as follows; 4

5 Table 3: Model summary Mod el Model Summary b R R Square Adjused R Square Sd. Error of he Esimae Durbin- Wason a a. Predicors: (Consan), FCF b. Dependen Variable: DA As you can see, in his model R is equal o which shows ha beween free cash flows and discreionary accruals here is a srong correlaion. Also he amoun of deermined coefficien is equal o which shows ha independen variable of free cash flows is able o deermine and explain he 9.5 percen of changes of dependen variable of discreionary accruals. Table 4: Anova es Model Sum of Squares ANOVA b df Mean Square F Sig. 1 Regression a Residual Toal a. Predicors: (Consan), FCF b. Dependen Variable: DA According o he resuls of above able he amoun of F which is meaningful in he level of fauls minimal han 0/01, shows ha independen variable has he high explanaory power and is able o explain he changes scales and variance of dependen variable. In oher words, he regression model of he research is a good model and we are able o explain he changes of dependen variable of discreionary accruals according o he independen variable of free cash flows. Table 5: Coefficiens es Model Unsandardized Coefficiens Coefficiens a Sandardized Coefficiens B Sd. Error Bea 1 (Consan) FCF a. Dependen Variable: DA For inerpreaion of above numbers we can say; Since sandardized regression coefficien (bea) for variable free cash flows is meaningful in a faul level smaller han 0/01 and is equal o 0/307, so we can conclude ha free cash flows variable is affecing discreionary accruals variable. Sig. 5

6 According o he above hypohesis of he research is approved so ha free cash flows have meaningful effec on discreionary accruals. References 1. Bhundia, A., (2012). A Comparaive Sudy beween Free Cash Flows and Earnings Managemen, Business Inelligence Journal, Chung, R, Firh, M & Kim, J. (2005), "Earning Managemen, Surplus Free Cash Flow, and Exernal Monioring", Journal of Business Research, 58, Copeland, T. E., Weson, J. F & Shasri, K. (2005), "Financial Theory and Capial Policy", Boson, MA, Addison-Wesley 4. Dechow, P. and G. S. (2006). "The Persisence of Earnings and Cash Flows and he Role of Special Iems: Implicaions for he Accrual Anomaly", Review of Accouning Sudies, 11, (2/3). 5. Dechow, Paricia; GE, Weili; Schrand, C., (2010), Undersanding earnings qualiy: A review of he proxies, heir deerminans and heir consequences, Journal of Accouning and Economics, v. 50, n. 2, pp Jensen M. C. (1986), "Agency Coss of Free Cash Flow, Corporae Finance and Takeovers", Am Econ Rev, 76, Len, K., & Poulsen, A. (1989), "Free Cash Flow and Sock Holder Gains in Going Privae Transacions", Journal of finance,44, Opler,. & Timan, S. (1993), "The Deerminans of Leveraged Buyou Aciviy: Free Cash Flow vs. Financial Disress Coss", Journal of Finance, 48, Subramanyam, K. R. (1996) The pricing of discreionary accruals. Journal of Accouning and Economics, v.22, n. 1, pp