Information disclosure quality and Earnings Management Evidence from Tehran Stock Exchange Fereydoun Ohadi 1, Tahmineh Shamsjahan 1 * 1 Department of Management and Economy,Sciences & Research Branch, Islamic Azad University, Hesarak, Tehran,I.R.Iran *corresponding author Abstract The aim of current research is scrutiny on information disclosure quality and its effect on earnings management activities. The sample included 74 companies listed in Tehran Stock Exchange during the period 2005 to 2010. Used statistical methods consisted, Logistic Regression and Ordinary Least Squares Regression models. The results of survey show that financial features of companies that have higher level of information disclosure quality are different of companies that have lower level of information disclosure quality. Also, companies which show lower Discretionary accruals are less exposure to earnings management.. Key words: Disclosure quality, discretionary accruals, earnings management. 1. Introduction For the past several years, economists thought that all related groups to stock company, such as managers and shareholders are working for a common goal. But from 1961 many cases of interest conflict between groups and how company`s confrontation with this problem was raised that is known agency theory"(jensen and Mack Ling, 1976: 308). The core of agency theory is based on this assumption that managers as representatives of shareholders is may such a way act or make decisions that necessarily is not in order to maximize shareholder wealth. According to this theory should be created mechanisms of control and sufficient regulatory to protection shareholders from interest conflict. The issue of financial statement transparency and disclosure quality provided in its, has been considered as a practical mechanism (Karamanou and Vafeas 2005: 453). In other words, in order to protection the interests of shareholders and other stakeholders, public disclosure and quality of information are necessary and according to following three aspects are important: 1. Illusory financial statements and information that has been omitted its important truths will not be available for investors. 2. Assuming semi-strong form of market efficiency, micro Investors will be supported through fair prices of securities that reflect all public information has been disclosed. 3. Public disclosure with high level of information quality provides excellent monitoring condition on performance. According to this, existence of financial information with high level of quality potentially reduces the possibility of manipulation and earnings management by companies` managers. In this regard, this research first of all examines motivation of the number of listed companies in Tehran Stock Exchange for accounting disclosure with high and low quality. Then, relationship between quality disclosure of issued information and earnings management activities evaluates. Actually, the main purpose of this survey finding an answer for these questions that: 1. Companies that provide high quality of accounting disclosures are likely to be significantly different than those do not? 2. Do Companies that provide high quality of accounting disclosure show lower discretionary accruals or not? 2. Material and methods 2.1. Data and sample: The statistical community is all of the companies which listed in Tehran Stock Exchange during 2004-2010. The Companies were selected based on these criteria: 1.These companies are accepted before 2004 in Tehran Stock Exchange. 2. Companies have not changes in fiscal year during period of study. 3. These are not Investment Companies and financial intermediation.4. Required information must be available in the variable definition section.5. Companies should not have to stop its activity during the specified period. 2.2. Research hypotheses: 1. Companies that provide high quality of accounting disclosures are likely to be significantly different than those do not 2. Companies that provide accounting disclosures with high quality likely show lower discretionary accruals. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 223
3. Statistical model 3.1. High quality disclosures For answering to this question that, do companies provide high quality of accounting disclosures have significantly difference with those that do not act?, logistic regression model as following has been used: AQ i;t = a 0 + a 1 TV i;t + a 2 PC i;t + a 3 MC i;t + a 4 D i;t + a 5 LSH i;t + a 6 AU i;t + e i;t Where, AQ i,t is a dummy variable representing the quality of reported information; AQ i,t =1 for companies reporting high quality information and AQ i,t =0 otherwise, TV i,t is the share trading volume scaled by shares outstanding, PC i,t is the log of the number of pages in the annual report, MC i,t is a dummy variable that proxies for changes in the management; MC i,t =1 when changes in the management have occurred in the year and MC i,t =0 otherwise, D i,t is the number of days with a non-zero volume in the period scaled by the total number of trading days, LSH i,t is The Log of the Share Trading Volume, AU i,t is a dummy variable that proxies for auditing; AU i,t =1 when a firm is audited by a Big auditor (Audit Organization) and AU i,t =0 otherwise, e i,t is the error term 3.2. Earnings management and high quality disclosure For answering to this question that do Companies that provide high quality of accounting disclosure show lower discretionary accruals or not?, Ordinary Least Squares Regression model as following has been used: DAC i,t = a 0 + a 1 AQ i,t + a 2 AQ i,t x OCF i,t + a 3 AQ i,t x LNA i;t + a 4 AQ i,t x ROA i,t + a 5 AQ i,t x TLSFU i,t + e i,t DAC i,t== Discretionary accruals are estimated by the modified Jones model. This study Regression results to be considered as discretionary accruals. 4. Results For testing the first hypothesis, dependent variable namely disclosure quality has been investigated along with independent variables, ratio of volume of shares traded to shares issued, natural logarithm of annual financial statements and footnotes, changes in company management, ratio of number of days which trading volume has been non-zero to the total number of annual trade days, natural logarithm of the volume of shares traded and type of audit. The results of the model estimation in Table1 are presented. Table 1:The results of model estimation - Quality of Disclosures Model variables Coefficient s S. E. Wald Sig. TV i,t 1.663 0.995 2.792 0.095 PC i,t 0.841 0.388 4.699 0.030 MC i,t 0.667 0.256 6.789 0.009 D i,t -0.813 0.578 1.979 0.160 LSH i,t 0.020 0.072 0.076 0.783 AU i,t -1.199 0.238 25.31 7 0.000 Constant -2.170 1.395 2.419 0.120 Chi-Square Statistic 42.637 Sig. 0.000 Cox & Snell R Square 0.094 Nagelkerke R Square 0.126 Hosmer and Lemeshow Statistic 4.686 Sig. 0.791 As in the table1, See it, the statistics level of chi-square and the significance level of this statistics indicates overall significance of the model. Comparison of significance level of Hosmer and Lemeshow statistics COPY RIGHT 2013 Institute of Interdisciplinary Business Research 224
with 5% error also shows model good conformity with the actual observations (goodness of fit model). amount indexes of R2 Cox & Snell - R2 Nagelkerke in the model respectively is 9.4%and 12.60%.In addition, amount Wald significant statistics and related coefficients to the independent variables showed that the natural logarithm of pages number of annual financial statements and footnotes and changes in company`s management has a positive and meaningfully relation and type of audit has a meaningfully and negative relation with disclosure quality. Type of relation between the natural logarithm of pages number of annual financial statements and footnotes, company`s management changes with disclosure quality reflects that with increasing in pages number of annual financial statements and footnotes, company`s management changes, disclosure quality of company increases. In contrast, the relation between the auditor type and disclosure quality indicates that companies which are audited by larger auditors, have lower disclosure quality than other companies. In total, can conclude that companies with high disclosure quality have difference natural logarithm of number pages of annual financial statements and footnotes, changes in company`s management and type of audit than companies with low disclosure quality. Nevertheless, there is no meaningfully relation between the ratio of volume of traded shares to issued shares, ratio of number pages that trading volume has been non- zero to total number of annual trading days and natural logarithm volume of traded shares with disclosure quality. For testing the second hypothesis first, dependent variable means discretionary accruals is calculated with use of Jones model then, with independent variables of disclosure quality, interaction between disclosure quality and ratio of cash flow from operating activities to total assets, natural logarithm of total assets, assets return ratio, ratio of total debts to equity have also been investigated.that results of the second hypothesis are presented in Table 2 Table 2:The results of model estimation - Quality of Disclosures Coefficient Model variables s S. E. t- Statistic Sig. AQ i;t 0.006 0.011 0.573 0.567 AQ i;t OCF i;t -1.094 0.059-18.461 0.000 AQ i;t LNA i;t 0.002 0.001 1.946 0.052 AQ i;t ROA i;t 0.943 0.041 23.150 0.000 AQ i;t TLSFU ;t 0.000 0.000 1.163 0.245 Constant -0.026 0.011-2.450 0.015 R 0.775 R-Square 0.600 Adjusted R-Square 0.595 F- Statistic 127.722 Sig. 0.000 Durbin Watson Statistic 1.522 As can be seen in the above table the F statistics and significance level of this statistics shows that the same meaningless being of whole of model (all coefficients are zero) is rejected and estimated Regression model in total is significant. In this model coefficient of determination is 0.006, means 60% of independent variable changes is explainable by dependent variables. In addition, the number of Durbin-Watson model 1.522 is between 1.500 and 2.500 and indicates there is no auto- correlation between model errors. A significant amount of T statistics and related coefficients to independent variables express that interaction between disclosure quality and ratio of cash flow from operational activities to total assets has a meaningfully and negative relation and interaction between disclosure quality and ratio of assets return has a meaningfully and positive relation with discretionary accruals. In other word, in companies with high disclosure quality, increasing in cash flow ratio from operational activities to total assets reduced discretionary accruals items and growth in assets return ratio enhanced discretionary accruals items. Nonetheless, there is no significant relation between disclosure quality, interaction between disclosure quality and natural logarithm of total assets, interaction between disclosure quality and total debts to total equity ratio with discretionary accruals. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 225
6. Discussion According to the results, the first hypothesis of research is confirmed. Because, there is meaningfully relationship between disclosure quality and number pages of financial statements means with increasing in number pages, disclosure will be more accurate and details as a result, disclosure will be with better quality. Also, there is significant and positive relationship between management changes and disclosure quality because of, when management changed, new management is trying to raise the quality of company disclosure.as a last reason, there is meaningfully and negative relationship between AU variable (that is index for companies` auditing by audit organization) and disclosure variable that express companies which are audited by audit organization generally, do not provide accounting disclosure with high quality. Based on the results obtained, the second hypothesis also is approved.in other word, in companies with high disclosure quality, increasing in ratio of cash flow from operational activities to total assets reduces discretionary accruals (declining of earnings management) and increasing in assets return ratio increases discretionary accruals(increasing of earnings management). Nevertheless, there is no significant relation between interaction of disclosure quality and natural logarithm of total assets, interaction of disclosure quality and ratio of total debts to total equity with discretionary accruals. 7. Suggestions for future According to the result of the first hypothesis based on this, companies present high quality of accounting disclosure have a significant difference with companies that do not this. Creation of persuasive policies, also corporates legal obligation by Stock Exchange Organization to timely disclosure of complete and accurate information to users and also reduction opportunity between sending information to exchange and public publication of information to users to prevent formation of reduction the personal use of information and reduction information asymmetry between companies and users are advised. Also, according to the results of the second hypothesis that there is no significant relationship between information disclosure quality and earnings management activities, recommended information disclosure requirements on companies listed in Tehran Stock Exchange by researchers to continually, assess and with the aim of promotion financial transparency in country, improving this requirements should be considered. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 226
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