Accounting Conservatism on the Net Present Value of the Investment, the Growth of Abnormal Profit, the Remaining Income

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1 Accounting Conservatism on the Net Present Value of the Investment, the Growth of Abnormal Profit, the Remaining Income Morteza Ashouri, Ebrahim Noruzbeigi 2, * Department of Accounting, Damghan Branch, Islamic Azad University, Damghan, Iran 2 Department of Accounting, Damghan Branch, Islamic Azad University, Damghan, Iran ABSTRACT This study, study, library and Causal-analyticall and based on panel data analysis (panel data) is. In this study, 2 financial firms listed in the Tehran Stock Exchange during the period from 387 to 392( has 62 firm - years). To analyze the results of the software Spss 2, Eviews 7 and Minitab 6 has been used. The results in connection with the confirmation of the first hypothesis suggests that the relationship between accounting conservatism and net present value of the investment, there was a significant relationship. Also according to the analysis made in connection with the second hypothesis study concluded that the abnormal growth of profit and the net present value of the investment, there was a significant relationship. Following the results of the study hypothesis with the third study showed that the net present value of residual income and investment, there significant inverse relationship. KEYWORDS Accounting conservatism, net present value of the investment, Growth of Abnormal, Remaining Income A INTRODUCTION ccounting conservatism is one of the topics covered in the cost of management accounting topics. Conservatism as accountants tend to confirm the existence of a higher degree of accountability to identify good news than bad news in the financial statements would be interpreted. Ie profit, bad news than good news reflected. In order to demonstrate conservatism and it can measure the relationship between earnings and stock returns used (Stone, 29). In our country, the Technical Committee on Corporate Audit theoretical concepts of financial reporting conservatism as one component of the qualitative characteristics of reliability considered, but did not use the word conservatism, but a word of caution instead Has used. *Corresponding Author: Ebrahim Noruzbeigi r: Telephone Number r: Fax. Number r: Financial Reporting Accounting Standards Iran joined in the theoretical concepts of caution stated, producers also have financial statements with the inevitable uncertainties that have overshadowed many of the events and conditions of the deal (Bvtsan et al., 2). Investors and creditors, management and other entities in the economic decisions are based on forecasts and expectations (Lim, 29). Since investors and financial analysts from profit as one of the main criteria for assessment used to measure the willingness of future profitability and growth in retained earnings due to asset growth rate to hold or sell their shares to the decision (Ohlson and Gao, 26). The principle difference in these projections is that the allocation of funds to departments and business units to determine this issue is also important for potential investors, the forecast cash flows and profits coming to the investors of and its capital resource allocation to ( Ohlson, 25). Anticipated earnings associated with fluctuations always retained earnings and asset growth rate of corporate earnings has been accompanied by positive changes (Penman, 25). Defining Conservatism: RESEARCH LITERATURE In traditional accounting conservatism as rapid detection and identification of delayed loss of profits defined, predictable earnings means earnings before there is a legal claim with respect to revenue recognition that cause and Verifiability of the income they (Ahmdan, et al., 22). Conservatism does not suggest that all cash flows related to income should be identified before interest, for example, identification of credit sales are received, but should be Verifiability cash flows. The adage in the empirical literature as "accountants tend to require a higher degree of demonstrable good news for recognition as a benefit, to recognize bad news as losses" is interpreted (Basu, 997). Confirmed conservatism degree of asymmetry for identifying gains and losses imperative. This interpretation can be made with conservative grading. This means that the difference in degree of approval is required for higher 28

2 profits and losses will be more conservative. This kind of interpretation of conservatism "demonstrable difference" is said to be 2 (Watts, 23). One of the important consequences of asymmetric behavior conservatism about the profits and losses insist on providing less than the net value of assets. Capital markets regulators, standard setters and academics, conservatism are criticized because they offer less than in the current period may provide less than the cost of future periods and thus lead to over indeed, the benefit of future periods. But APB (Accounting Principles Board) conservatism as a moderator of the Covenant Financial Accounting Statement No. 4 on the list of the states that assets and liabilities are often determined in a substantially uncertain conditions and thus accountants precautions respond. The relationship between the quality of accounting information, conservatism and the cost of capital: As by Lambert et al (26) noted the relationship between the quality of accounting information and the equilibrium rate of return on the Securities is one of the very important issues in accounting in recent years. Although it has existed for many years, the head of the US Securities and Exchange Committee (998) saying that high quality accounting information to increase investor confidence and thereby increase liquidity and reduce the cost of capital, more Is taken into consideration. Although similar studies such as research on the economic role of Akerlof (97), pointed out that the existence of information asymmetry leads to non-optimal allocation of resources and problems of adverse selection, which is a growth market equilibrium rate, but financial theoretical foundations of the classical stated that the quality of accounting information of little or no effect on price formation in the markets. However, recent research conducted in this field show that participation in investment in the quality of accounting information. Analytical study by Lambert confirmed that the quality of accounting information on capital expenditure in spite of firm-specific diversity is effective. Similarly, Elsie and Aharv (24) showed that in a state of equilibrium, the amount and quality of information on asset prices affect investors higher yields to hold their shares in the presence of information asymmetry charge. When the asymmetry of information for investors holding other informed with stock, are at higher risk. Because they have less ability to coordinate their investment portfolio are recorded with new information, so we are seeking higher rates of return. Therefore, it is expected to improve the company's various factions of information asymmetry to their demand for reserves and reduce the rate of return necessary. Elsie and Avharv argue that one of the ways the company on its balance affects the rate of return is based on the modified accounting practices (Lewis et al, 29). BACKGROUND RESEARCH Lim (24), in a study entitled "The Relationship between accounting conservatism and corporate governance", the three models used to measure the accounting conservatism. In a period between 2 and 23 and in Australian companies came to the conclusion that a positive relationship between the independent directors on the board and accounting conservatism in a model of the three studied there. Tao (23), in his research as "conservative accounting and investment lower than the" standard of knowledge argues that asymmetric gains and losses (conservative) can be extremely opportunistic behavior of managers that lead earnings performance and stimulate managers to worry about going to the projects with positive net present value is less than the investment that will be followed. The experimental results showed that conservative accounting and investment lower than the positive correlation and positive correlation, for firms with high volatility, has been announced. Saghafy and sadidi (39), with the effect of accounting conservatism on earnings quality and stock returns, trying to improve the way decisions were shareholders. They argue that the use of quality indicators are defined on the basis of conservatism can be part of the difference between the rate of return on operating assets and current stock returns are explained by the following year. In addition to the above results, the study showed that the adjusted earnings quality index based on conservative and operational return on assets, asset turnover rate Operating return on equity was statistically significant, but on the contrary, between the index and margin there is no significant relationship. Mohammad Abadi and Bayazidi (39), to evaluate and compare the explanatory power of residual income valuation models and abnormal growth in the value of the firms' profits. The period from 38 to 385 is its realization. Their results showed that the residual income valuation model and abnormal growth in profits in the industry and there is no significant difference in total. RESEARCH HYPOTHESES After the formulation of questions, research hypotheses have been developed as follows: First hypothesis: Between conservative accounting and investment there is a significant net present value. The second hypothesis: Abnormal growth of profit and net present value of investment there is a significant relationship. The third hypothesis: The net present value of residual income and investment firms have a significant relationship. RESEARCH METHODOLOGY Descriptive statistics of variables: In general, the methods by which it can be processed and summarized data, called descriptive statistics.this type of data. The goal is simply to describe the community or sample of the population parameters or sample is calculated (Azar and Momeni, 389, p. 8). The descriptive statistics, data analysis using descriptive statistics such as mean, median and standard deviation measures the dispersion, skewness and kurtosis done. In this connection, the average of the main central index, and average data shows, so that if the data on an axis aligned on a regular basis, the average value exactly balance point or center of gravity is distributed. Standard deviation of dispersion parameters and the scattering data show.skewness of the parameters 29

3 determining the deviation of symmetry and asymmetry index data. If you have a community of symmetrical distribution, skewness coefficient equal to zero, if the society is skewed to the left, if you have negative skewness coefficient is skewed to the right, skewness coefficient is Tab.. Graphic, descriptive statistics variables positive. Elongation is the measure of the dispersion of the population compared to the normal distribution (Momeni and Ghaiyoomi, 39). Brief descriptive statistics of the variables after removing the outliers screening software is provided in Table Spss 2. Elongation Skewness Maximum amount Lowest.33.6 Standard deviation Average Number of Views Net Present Value Accounting conservatism Abnormal profit growth Residual income Company Risk profit sharing size of the company Credit rating Stock price changes According to the figures, the average net present value of investment companies and.44 respectively.skewness and kurtosis assess these variables which should be respectively and 3 is normally distributed variables, shows that this variable is not normally distributed. TEST THE NORMAL DISTRIBUTION OF THE DEPENDENT VARIABLE In this study was to estimate the parameters of the ordinary least squares method used in this study the issue through the Kolmogorov-Smirnov test (KS) is evaluated. In this test the null hypothesis and the alternative hypothesis is as follows: H H : Normal Distrbuton : Not Normal Distribution If the level of statistical significance of the test is more than. 5 (Prob>.5) hypothesis of normal distribution of the variable will be accepted. The figures KS test results for the dependent variable sample companies provided. Significance level (Sig).38 Tab. 2. Normality of the dependent variable image results Statistic (K- S).52 The number (N) 62 Net Present Value Johnson transfer function is used to normalize the data and software is Minitab 6 analysis. The results of the KS test after the normal process image data as is. Tab.3. Normality of the dependent variable scanning results after the normalization process Significance level (Sig).862 Statistic (K- S).6 The number (N) 62 Net Present Value Since then normalized with respect to the image data significance level (Sig). Kolmogorov-Smirnov test for the dependent variable is higher than.5 (.862), so the hypothesis at 95%, indicating this is confirmed the dependent variable after normalization process, are normally distributed. CORRELATION BETWEEN VARIABLES In this section, using Pearson's correlation coefficient to assess the relationship between the variables and the correlation between them will be discussed.matrix of correlations between variables are presented in Table.Based on the results of statistic Pearson. Risk and significant positive correlation with company size company. Credit rating has a positive and significant correlation with the stock price changes. Tab.4. Matrix Pearson correlation coefficients between variables Net Present Value Accounting conservatism Abnormal profit growth Residual income Company Risk profit sharing size of the company Credit rating Stock price changes Net Present Value 3

4 Accounting conservatism -.54 (.79) Abnormal profit growth.45 (.266).5 (.93) Residual income.53 (.88). (.988).6 (.888) Company Risk.9 (.644).8 (.839).33 (.45).33 (.43) profit sharing -.5 (.894).9 (.822) /2 (.758) -.4 (.329) -. (.777) size of the company.24 (.556) -.8 (.844).3 (.444).35 (.384).982 (.).9 (.82) Credit rating.2 (.6).23 (.566).6 (.35).7 (.872).28 (.493) -. (.782).4 (.38) Stock price changes -.28 (.496).34 (.47).67 (.96) -.44 (.28) -.4 (.722).5 (.73) -.4 (.96).433 (.) CONCLUSION The results of the first hypothesis: The first hypothesis test the relationship between accounting conservatism and the net present value of the investment, and statistical hypothesis defined as follows: H: between accounting conservatism and net present value of the investment, there is no significant relationship. H: between accounting conservatism and the net present value of the investment, there is a significant relationship. This hypothesis using converters () for panel data estimation and if the coefficient is statistically significant at the 95% confidence level will be verified. H H : : To be certain whether the use of panel data in estimating the model will be efficient or not, the Chow test in order to determine which method of tying or F (fixed effects or random effects) is more appropriate to estimate (recognition of the differences between fixed or random cross-sectional units) used the Hausman test. The results of these tests are presented in table. Tab. 5. Picture of Chow and Hausman test results for the model () P- Value The statistics (.499) The statistics Statistics F 2 Number Test Chow Hausman () According to Chow test and P-Value of (.49), test hypothesis rejected at 95%, indicating that the method can be used panel data. Also according to the results of Hausman and P-Value of (.246), which is less than.5, test assumptions and hypotheses are rejected at the 95% confidence level is accepted. Therefore, the model is estimated using fixed effects. To test the validity of the classical regression model assumptions and analysis is required in addition to the lack of co-linearity between the independent variables in the model, tests remained normal in connection with the consistency of variances, independence of residuals and the absence of clear error model (linearity model) will also be performed. To test the normality of error terms can be used for various tests. One of these tests is to test Jarek bera this test has been used in this study. Jarek bera test results to show that residues of the model study, 95% of the distribution was normal, so that the probability of this test (.5392) is larger than.5. One of the assumptions of the classical regression residual variance is inconsistency. The search for homogeneity of variance test was used for pagan. Considering the importance of this test, which is smaller than.5 (.283), the null hypothesis is rejected and it can be said that there is a similarity variance heterogeneity of variance model is a problem. In this study, to fix the problem in estimating estimated using generalized least squares (GLS) is used. Also in this study to test the residuals are not correlated that one of the assumptions of regression and correlation analysis and called the Durbin Watson (DW) is used. According to preliminary results of the Durbin-Watson statistic estimation of between.5 and 2.5 is 2.32, and since it can be concluded that the residuals are independent. In addition, to test whether the linear regression model and whether the model of the relationship 3

5 between linear and non-linear explanation is correct or not coded test was used. Given that the level of symbolic test (.897) is larger than.5, so the null hypothesis of this test has been verified that the linear model and the model error is not specified. Summary results are presented in table above. Tab.6. Picture of the results of the statistical assumptions of the model () Statistics Ramsey P Va.89 7 F D 2.32 Statistics Durbin- Watson P Value.283 Statistics Breusch- Pagan F.953 Statistics Jarque- Bera P Value According to the results of tests Chow and Hausman and also test classic assumptions of the regression model () research using panel data and fixed effects estimated for. The results are presented in table. The model is estimated using the software will be Eviews 7 as follows: Tab. 7. Picture of the first hypothesis test results using fixed effects Relation Positive The dependent variable: net present value investment P- Value.296 Views: 62 years - the company T- statistics.4529 Factor.5482 Fixed component investment companies, is explained by variables in the model. Reviews significant factors in the results presented in the figure, since the possibility of variable coefficient t-statistic for accounting conservatism is smaller than.5 (.47), resulting in a significant relationship between accounting conservatism and the net present value of investment companies approved the 95 percent confidence level. The first hypothesis is accepted and can say with 95% confidence between accounting conservatism and the net present value of the investment, there is a significant relationship. The positive coefficient for this variable (.22) show a direct relationship between accounting conservatism and the net present value of the investment is increased by unit so that accounting conservatism, the net present value of the investment as well as the.22 units increases. Thus, according to the analysis made in connection with the confirmation of the first hypothesis can be concluded that the accounting conservatism and the net present value of the investment, there was a significant relationship. The results of the second hypothesis: The aim of this study is to test the hypothesis whether the abnormal growth of profit and the net present value of the investment, there is a significant relationship or not? And statistical hypothesis expressed as follows: H: the abnormal growth of profit and the net present value of the investment, there is no significant relationship. H: the extraordinary growth in interest and net present value of the investment, there is a significant relationship. This hypothesis using converters () for panel data estimation and if the coefficient is statistically significant at the 95% confidence level will be verified. Positive Accounting conservatism Positive meaningl ess meaningl ess (.) Determining factor model Statistics F Abnormal profit growth Residual income Company Risk profit sharing size of the company Credit rating Stock price changes In considering the significance of the F-statistic model, given that the probability of smaller.5 (.), with 95% of the model is confirmed significant. Determining model suggests that 7.42 percent of the net present value of ) 2( H : 2 H : 2 Reviews significant factors in the results presented in table above, since the possibility of variable coefficient t- statistic for the growth of abnormal profit is smaller than.5 (.378), resulting in a significant relationship between the abnormal growth of profit and net present value invested enterprises at 95 percent is approved. The second hypothesis is accepted and can say with 95% of the present value of net investment gains and extraordinary growth, there is a significant relationship. The positive coefficient for this variable (.7) show a direct relationship between the abnormal growth of profit and net present value of the investment is increased by unit so that the abnormal profit growth, net present value investment.7 the amount of units increases. Thus, according to the analysis made in connection with the second hypothesis can be concluded that the abnormal growth of profit and the net present value of the investment, there was a significant relationship. 32

6 The results of the third hypothesis: In the third hypothesis of the relationship between income and the net present value of the remaining investment, evaluated and statistical hypothesis expressed as follows: H: the net present value of residual income and investment, there is no significant relationship. H: between residual income and the net present value of the investment, there is a significant relationship. This hypothesis using converters () for panel data estimation, and if the coefficient is significant at 95%, will be approved. )3( H : 3 H : 3 Reviews significant factors in the results presented in table above, since the possibility of variable coefficient t- statistic for residual income is less than.5 (.68), resulting in a significant relationship between residual income and net present value of capital investment firms at 95 percent is approved. 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