Daruosh Foroghi, Ph.D. ,
Professor
Department Of AccountingFaculty Of Administrative Sciences And Economics
Address
University of Isfahan
Azadi square
Isfahan, Iran
Postal Code : 8174673441
Research Output
Articles
2023
پیشرفت های حسابداری (20089988)(2)pp. 39-64
Introduction
Costs are the main driver of company profitability and therefore company value. Therefore, it is important to understand how cost asymmetry affects firm value, since maximizing firm value is considered the primary objective of the firm. During a sales downturn, holding stagnant resources reduces the present value of sales and increases the opportunity cost of holding unused resources, thereby reducing the firm's profitability and negatively affecting firm value. Firms with higher cost stickiness will have lower profits because cost stickiness causes less inventory adjustment when sales decline. This further reduction in profit when activity levels decrease increases the variability of the profit distribution, resulting in lower profit forecasts. Firms with stickier costs have less analyst coverage, and investors rely less on the realized earnings of such firms due to their lower predictive power. Cost stickiness has been shown to increase credit risk. This increase in credit risk leads to an increase in costs and a decrease in profit, which leads to a decrease in the value of the company.
Two currents that increase the intensity of cost stickiness are resource adjustment costs and agency problems. When the demand decreases, the manager can adjust the company's resources according to the changes in the demand level, but this creates adjustment costs, such as the adjustment costs related to labor and equipment. In fact, companies are forced to bear adjustment costs in order to set aside resources and replace the same resources if the demand returns to the original situation. Adjustment costs include such things as compensation for laid-off employees and the costs of searching and training new employees. The authority of the management to determine the level of resources, when the demand decreases, is one of the factors of creating the stickiness of the costs related to these resources. The cost of resource adjustment affects the degree of cost stickiness.
The agency problem occurs due to the mismatch of interests between principals (shareholders) and agents (managers). One consequence of the agency problem is that managers who engage in empire-building activities over represent the firm by retaining unused resources in order to gain base, power, compensation, and prestige. For example, overinvestment in labor (over-hiring or under-firing) can result from managers' desire to engage in empire-building activities while retaining low-performing projects. According to previous literature on agency theory, unused resources are conserved because managers obtain monetary and non-monetary benefits from managing large and complex organizations and try to avoid difficult and time-consuming decisions about discarding unused resources. Therefore, companies that have a specific agency problem have more opportunities to sell costs in operational costs such as administrative costs, which lead to cost stickiness and intensify the effect of it. Cost stickiness is one of the factors affecting the value of the firm, which can be caused by resource adjustment costs or agency problems, and this was the main motivation of this study.
Hypotheses
According to the theoretical foundations and objectives of the research, the hypotheses of the research are as follows:
H1: Cost stickiness has a negative effect on firm value.
H2: The resource adjustment cost increases the intensity of the cost stickiness effect on the firm's value.
H3: Agency problems increase the intensity of cost stickiness effect on firm value.
Method
The statistical population of this study are all companies listed in Tehran Stock Market, in which 102 companies in the period 2013 to 2022 have been selected by systematic elimination method. For data analysis and hypothesis testing, multivariate regression model based on compound data is used.
Result
The research results showed that cost stickiness has a negative effect on firm value. Also, the findings showed that when the resource adjustment cost is high, the effect of cost stickiness on the value of the firm increases. In addition, agency problems do not affect the relationship between costs and firm value.
Discussion and Conclusion
This study, therefore, provides insight and understanding into how managers’ deliberate resource adjustment decisions affect overall financial health and firm value. Perhaps managers need to be more transparent about their resource adjustment decisions, so that investors can incorporate both resource adjustment costs and managerial expectations of future demand, when doing risk assessments related to their investment decisions.
Keywords: Firm Value, Cost Stickiness, Resource Adjustment Cost, Agency Problem.
Costs are the main driver of company profitability and therefore company value. Therefore, it is important to understand how cost asymmetry affects firm value, since maximizing firm value is considered the primary objective of the firm. During a sales downturn, holding stagnant resources reduces the present value of sales and increases the opportunity cost of holding unused resources, thereby reducing the firm's profitability and negatively affecting firm value. Firms with higher cost stickiness will have lower profits because cost stickiness causes less inventory adjustment when sales decline. This further reduction in profit when activity levels decrease increases the variability of the profit distribution, resulting in lower profit forecasts. Firms with stickier costs have less analyst coverage, and investors rely less on the realized earnings of such firms due to their lower predictive power. Cost stickiness has been shown to increase credit risk. This increase in credit risk leads to an increase in costs and a decrease in profit, which leads to a decrease in the value of the company.
Two currents that increase the intensity of cost stickiness are resource adjustment costs and agency problems. When the demand decreases, the manager can adjust the company's resources according to the changes in the demand level, but this creates adjustment costs, such as the adjustment costs related to labor and equipment. In fact, companies are forced to bear adjustment costs in order to set aside resources and replace the same resources if the demand returns to the original situation. Adjustment costs include such things as compensation for laid-off employees and the costs of searching and training new employees. The authority of the management to determine the level of resources, when the demand decreases, is one of the factors of creating the stickiness of the costs related to these resources. The cost of resource adjustment affects the degree of cost stickiness.
The agency problem occurs due to the mismatch of interests between principals (shareholders) and agents (managers). One consequence of the agency problem is that managers who engage in empire-building activities over represent the firm by retaining unused resources in order to gain base, power, compensation, and prestige. For example, overinvestment in labor (over-hiring or under-firing) can result from managers' desire to engage in empire-building activities while retaining low-performing projects. According to previous literature on agency theory, unused resources are conserved because managers obtain monetary and non-monetary benefits from managing large and complex organizations and try to avoid difficult and time-consuming decisions about discarding unused resources. Therefore, companies that have a specific agency problem have more opportunities to sell costs in operational costs such as administrative costs, which lead to cost stickiness and intensify the effect of it. Cost stickiness is one of the factors affecting the value of the firm, which can be caused by resource adjustment costs or agency problems, and this was the main motivation of this study.
Hypotheses
According to the theoretical foundations and objectives of the research, the hypotheses of the research are as follows:
H1: Cost stickiness has a negative effect on firm value.
H2: The resource adjustment cost increases the intensity of the cost stickiness effect on the firm's value.
H3: Agency problems increase the intensity of cost stickiness effect on firm value.
Method
The statistical population of this study are all companies listed in Tehran Stock Market, in which 102 companies in the period 2013 to 2022 have been selected by systematic elimination method. For data analysis and hypothesis testing, multivariate regression model based on compound data is used.
Result
The research results showed that cost stickiness has a negative effect on firm value. Also, the findings showed that when the resource adjustment cost is high, the effect of cost stickiness on the value of the firm increases. In addition, agency problems do not affect the relationship between costs and firm value.
Discussion and Conclusion
This study, therefore, provides insight and understanding into how managers’ deliberate resource adjustment decisions affect overall financial health and firm value. Perhaps managers need to be more transparent about their resource adjustment decisions, so that investors can incorporate both resource adjustment costs and managerial expectations of future demand, when doing risk assessments related to their investment decisions.
Keywords: Firm Value, Cost Stickiness, Resource Adjustment Cost, Agency Problem.
پیشرفت های حسابداری (20089988)(1)pp. 227-257
Introduction
Accounting earnings is an appropriate measure for performance evaluation, stock valuation, forecasting and evaluation of expected returns, as well as predicting the company's future performance. Therefore, the announcement of earnings is one of the criteria used to evaluate the reaction of investors to the announced earnings. Like the announcement of earnings, the timing of the earnings announcement also affects the price and returns. Through the timing of the earnings announcement, companies have the possibility to influence the investors' reaction to the reported information, and the market's reaction to the earnings announcement is affected by the time of issuance of the reports. The results of the previous literature show that market reaction to the earnings announcement is influenced by the time of declaring news and reports. The results of these studies show that the announcement of delayed earnings results in negative market reaction, and investors discount this information. This issue can be caused by the reduction of information content of earnings or the possibility of earnings manipulation by managers. Considering the effect of the timing of earnings announcement on the market reaction and also the existence of various motivations for earnings manipulation, it seems necessary to investigate the effect of the timing of the earnings announcement on stock returns and the effect of earnings manipulation on this relationship. Therefore, the purpose of this study is to investigate the effect of the delay in announcing quarterly earnings on abnormal stock returns by considering the moderating role of earnings manipulation.
Hypothesis
According to the literature, the research hypotheses include:
1. The delay of quarterly earnings announcement has a negative effect on abnormal returns at the time of earnings announcement.
Earnings manipulation exacerbates the negative impact of late quarterly earnings announcements on abnormal returns at the time of earnings announcements.
Methods
In this study, to calculate the variables and test the hypotheses, required data has been collected from the annual and quarterly financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 126 listed companies in Tehran Stock Exchange during 2012 to 2022. To test hypotheses OLS regression and panel data methods have been used.
Results
The result of the first hypothesis test showed that the delay of quarterly earnings announcement has a negative and significant effect on the abnormal return. Also, according to the second hypothesis, earnings manipulation based on the adjusted model of Beneish (1999) aggravates this negative effect. That is, the delayed earnings announcement in the investors' view can involve earnings manipulation and as a result, the negative reaction to the delay in quarterly earnings announcements will intensify. However, earnings manipulation based on the model of Kothari et al. (2005) did not have a significant effect on the negative market reaction to the delayed earnings announcement.
Discussion and Conclusion
According to the accounting literature, the delayed earnings announcement is accompanied by negative market reaction and investors discount this information. Chen et al. (2021) believe that this negative reaction can be caused by a reduction in the information content of delayed earnings or the possibility of earnings manipulation by managers. Therefore, in this study, the effect of the delay of quarterly earnings announcement on abnormal stock returns by considering the moderating role of earnings manipulation was investigated.The results of the first hypothesis test showed that the coefficient of delayed earnings announcement at the 95% confidence level has a negative and significant effect on the accumulated abnormal return, which shows, the longer the quarterly earnings announcement is delayed, the lower the cumulative abnormal return in the earnings announcement window; then the first hypothesis is not rejected. In other words, the capital market reacts negatively to the delayed earnings announcement. In the second hypothesis, the effect of earnings manipulation on the negative relationship between the delayed earnings announcement and cumulative abnormal return was investigated. The results of the test of this hypothesis showed that earnings manipulation based on the model of Kothari et al. (2005) has no significant effect on the negative relationship between the delayed earnings announcement and abnormal returns, and the second hypothesis is rejected based on this criterion. This result is consistent with Chen et al. (2021). However, according to the earnings manipulation criterion based on the adjusted Beneish model (1999), the coefficient of the interactive variable RLaq × EMB is negative and significant at the 95% confidence level. Considering the negativity of the coefficient of the interactive variable and also the negative effect of the delayed earnings announcement on the accumulated abnormal return (first hypothesis), it can be said that the earnings manipulation based on the adjusted model of Beneish (1999), aggravates the negative effect of the delayed earnings announcement on the abnormal return, so the second hypothesis is not rejected. This shows that the delayed earnings announcement can contain information about the possibility of earnings manipulation, and investors react negatively to this announcement of earnings.
Accounting earnings is an appropriate measure for performance evaluation, stock valuation, forecasting and evaluation of expected returns, as well as predicting the company's future performance. Therefore, the announcement of earnings is one of the criteria used to evaluate the reaction of investors to the announced earnings. Like the announcement of earnings, the timing of the earnings announcement also affects the price and returns. Through the timing of the earnings announcement, companies have the possibility to influence the investors' reaction to the reported information, and the market's reaction to the earnings announcement is affected by the time of issuance of the reports. The results of the previous literature show that market reaction to the earnings announcement is influenced by the time of declaring news and reports. The results of these studies show that the announcement of delayed earnings results in negative market reaction, and investors discount this information. This issue can be caused by the reduction of information content of earnings or the possibility of earnings manipulation by managers. Considering the effect of the timing of earnings announcement on the market reaction and also the existence of various motivations for earnings manipulation, it seems necessary to investigate the effect of the timing of the earnings announcement on stock returns and the effect of earnings manipulation on this relationship. Therefore, the purpose of this study is to investigate the effect of the delay in announcing quarterly earnings on abnormal stock returns by considering the moderating role of earnings manipulation.
Hypothesis
According to the literature, the research hypotheses include:
1. The delay of quarterly earnings announcement has a negative effect on abnormal returns at the time of earnings announcement.
Earnings manipulation exacerbates the negative impact of late quarterly earnings announcements on abnormal returns at the time of earnings announcements.
Methods
In this study, to calculate the variables and test the hypotheses, required data has been collected from the annual and quarterly financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 126 listed companies in Tehran Stock Exchange during 2012 to 2022. To test hypotheses OLS regression and panel data methods have been used.
Results
The result of the first hypothesis test showed that the delay of quarterly earnings announcement has a negative and significant effect on the abnormal return. Also, according to the second hypothesis, earnings manipulation based on the adjusted model of Beneish (1999) aggravates this negative effect. That is, the delayed earnings announcement in the investors' view can involve earnings manipulation and as a result, the negative reaction to the delay in quarterly earnings announcements will intensify. However, earnings manipulation based on the model of Kothari et al. (2005) did not have a significant effect on the negative market reaction to the delayed earnings announcement.
Discussion and Conclusion
According to the accounting literature, the delayed earnings announcement is accompanied by negative market reaction and investors discount this information. Chen et al. (2021) believe that this negative reaction can be caused by a reduction in the information content of delayed earnings or the possibility of earnings manipulation by managers. Therefore, in this study, the effect of the delay of quarterly earnings announcement on abnormal stock returns by considering the moderating role of earnings manipulation was investigated.The results of the first hypothesis test showed that the coefficient of delayed earnings announcement at the 95% confidence level has a negative and significant effect on the accumulated abnormal return, which shows, the longer the quarterly earnings announcement is delayed, the lower the cumulative abnormal return in the earnings announcement window; then the first hypothesis is not rejected. In other words, the capital market reacts negatively to the delayed earnings announcement. In the second hypothesis, the effect of earnings manipulation on the negative relationship between the delayed earnings announcement and cumulative abnormal return was investigated. The results of the test of this hypothesis showed that earnings manipulation based on the model of Kothari et al. (2005) has no significant effect on the negative relationship between the delayed earnings announcement and abnormal returns, and the second hypothesis is rejected based on this criterion. This result is consistent with Chen et al. (2021). However, according to the earnings manipulation criterion based on the adjusted Beneish model (1999), the coefficient of the interactive variable RLaq × EMB is negative and significant at the 95% confidence level. Considering the negativity of the coefficient of the interactive variable and also the negative effect of the delayed earnings announcement on the accumulated abnormal return (first hypothesis), it can be said that the earnings manipulation based on the adjusted model of Beneish (1999), aggravates the negative effect of the delayed earnings announcement on the abnormal return, so the second hypothesis is not rejected. This shows that the delayed earnings announcement can contain information about the possibility of earnings manipulation, and investors react negatively to this announcement of earnings.
2019
پیشرفت های حسابداری (20089988)(2)pp. 253-284
Fair value accounting for valuation of assets and liabilities has given managers the discretion.The purpose of this study is to investigate the effect of manager’s discretion allowed in fair value measurement on investment selling decisions. In order to test the research hypotheses, a questionnaire based on the scenario was used. This questionnaire is based on Green et al. (2015). The statistical population consists of all active financial analysts in investment companies and stock exchange brokers and the statistical sample of the study was determined using the sample size tables of Cohen et al. (2000) of 268 people. Multivariate analysis of variance (MANOVA) and univariate analysis of variance (ANOVA) were used to analyze the data and test hypotheses. The results of this study showed that conservatism and its interaction with the fair value volatility have a significant effect on the investment selling decisions based on fair value, but the fair value volatility has no significant effect on these decisions. Overall, the results of the research showed that the directors' discretions in fair value accounting affects investment selling decisions.
1- Introduction
Accounting academics and practitioners have been debating the reliability and relevance of fair value accounting. According to Financial Accounting Standards, fair value accounting, often referred to as mark-to-market occurs when a firm revalues assets and liabilities based on an exit price. Advocates contend that fair value provides valuable and timely information to financial statement users by increasing transparency that aid in assessing firm value. In contrast, opponents argue that fair value is transitory because once the asset or liability is traded, the related accounting entries are reversed (Green, 2015). Thus, fair value may provide misleading and unreliable information. In particular, Level 3 fair value assets have no observable inputs and are valued by managers’ assumptions, thus the fair value is subjective (Zyla, 2013).
Level 3 fair values are unique in that subjective assumptions that are necessary to arrive at the fair value are based on unobservable inputs. According to the IASB codification glossary, unobservable inputs are defined as “market data that are not available and that are developed using the best information available about the assumptions that market participants would use 2 when pricing the asset or liability”. Depending on the valuation method selected, discretion can include the expected life of the asset or liability, the cash discount rate, and risk return rates (Zyla, 2013). This discretion can affect financial statements.
Prior reserch has established that factors such as earnings management (Dechow and Shakespear, 2009, Dechow et al, 2010), optimism (Kedia and Philippon, 2009), national culture (Ball et al., 2000), fear of litigation (Lobo and Zhou, 2006), and auditor compliance (Milbradt 2012) influence the recognized fair value. However, limited research has examined how managerial behavioral effects prior to recognizing fair value (Chen et al., 2013, Green, 2015).
Motivated reasoning theory contends that individuals will perceive information in a manner that will benefit their desired outcome (Kunda 1990). Thus, managers are likely to view a fair value that results in gains as a valid representation of the true underlying value. Because of the resulting unrealized gains, managers will be motivated to base Level 3 fair value selling decisions at the fair valuation amount (Green, 2015).
When examining manager’s likelihood to sell a Level 3 fair value asset or liability, prospect theory (Kahneman and Tversky, 1979) suggests that only unrealized gain from the increase of the recognized fair value will motivate managers to be risk averse. In order to preserve the unrealized gain, managers will not sell the asset or liability if the market offers a price less than the most recent recognized fair value (Green, 2015).
2- Research hypotheses
Based on theoretical foundations and research background, the research hypotheses can be expressed as follows:
H1: The conservative level used in the assessment of fair value affects the decision to sell investment at the 3 level of fair value.
H2: The level of historical volatility of fair value affects the decision to sell investment at the 3 level of fair value.
H3: The interaction of the level of conservatism and the level of historical volatility of fair value, affects the decisio to sell investment at the 3 level of fair value.
3- Methods
This research in terms of purpose is a fundamental research, in terms of method is quasi-empirical and in the point of data collection is survey. In this research, to test the research hypotheses, a questionnaire based on the scenario was used. This questionnaire is based on Green (2015). The statistical population consists of all active financial analysts in investment companies and stock exchange brokers and the statistical sample of the study was determined using the sample size tables of Cohen et al. (2000) of 268 people. Multivariate analysis of variance (MANOVA) and univariate analysis of variance (ANOVA) were used to analyze the data and test hypotheses.
4- Results
The results of this study showed that conservatism and its interaction with the fair value volatility have a significant effect on the investment selling decisions based on fair value. However, the fair value volatility has no significant effect on these decisions. The other results showed that financial analysts' demographic characteristics do not have a significant effect on investment decision-making. Overall, the results of the research showed that the directors' discretions in fair value accounting affects investment selling decisions.
5- Discussion and conclusion
Findings of the research indicate that with the increase in the level of conservatism used in the assessment of fair value, managers' willingness to sell investments increases. This result is consistent with the motivated reasoning and the prospect theory. The results of this study are consistent with the results of Green (2015). In addition, the results of the research showed that the historical volatility of fair value does not affect the decision of investment sales. This result is not consistent with agency theory and prospect theory, but is consistent with the results of Green (2015). The sensitivity analysis of this result suggests that, the increase in the fair value volatility, the asking sales price and the probability of sales below the current fair value has not increased and did not reduce the lowest acceptable price.
Keywords: Manager Discretion, Conservatism, Fair Value Volatility, Investment Selling Decisions.
1- Introduction
Accounting academics and practitioners have been debating the reliability and relevance of fair value accounting. According to Financial Accounting Standards, fair value accounting, often referred to as mark-to-market occurs when a firm revalues assets and liabilities based on an exit price. Advocates contend that fair value provides valuable and timely information to financial statement users by increasing transparency that aid in assessing firm value. In contrast, opponents argue that fair value is transitory because once the asset or liability is traded, the related accounting entries are reversed (Green, 2015). Thus, fair value may provide misleading and unreliable information. In particular, Level 3 fair value assets have no observable inputs and are valued by managers’ assumptions, thus the fair value is subjective (Zyla, 2013).
Level 3 fair values are unique in that subjective assumptions that are necessary to arrive at the fair value are based on unobservable inputs. According to the IASB codification glossary, unobservable inputs are defined as “market data that are not available and that are developed using the best information available about the assumptions that market participants would use 2 when pricing the asset or liability”. Depending on the valuation method selected, discretion can include the expected life of the asset or liability, the cash discount rate, and risk return rates (Zyla, 2013). This discretion can affect financial statements.
Prior reserch has established that factors such as earnings management (Dechow and Shakespear, 2009, Dechow et al, 2010), optimism (Kedia and Philippon, 2009), national culture (Ball et al., 2000), fear of litigation (Lobo and Zhou, 2006), and auditor compliance (Milbradt 2012) influence the recognized fair value. However, limited research has examined how managerial behavioral effects prior to recognizing fair value (Chen et al., 2013, Green, 2015).
Motivated reasoning theory contends that individuals will perceive information in a manner that will benefit their desired outcome (Kunda 1990). Thus, managers are likely to view a fair value that results in gains as a valid representation of the true underlying value. Because of the resulting unrealized gains, managers will be motivated to base Level 3 fair value selling decisions at the fair valuation amount (Green, 2015).
When examining manager’s likelihood to sell a Level 3 fair value asset or liability, prospect theory (Kahneman and Tversky, 1979) suggests that only unrealized gain from the increase of the recognized fair value will motivate managers to be risk averse. In order to preserve the unrealized gain, managers will not sell the asset or liability if the market offers a price less than the most recent recognized fair value (Green, 2015).
2- Research hypotheses
Based on theoretical foundations and research background, the research hypotheses can be expressed as follows:
H1: The conservative level used in the assessment of fair value affects the decision to sell investment at the 3 level of fair value.
H2: The level of historical volatility of fair value affects the decision to sell investment at the 3 level of fair value.
H3: The interaction of the level of conservatism and the level of historical volatility of fair value, affects the decisio to sell investment at the 3 level of fair value.
3- Methods
This research in terms of purpose is a fundamental research, in terms of method is quasi-empirical and in the point of data collection is survey. In this research, to test the research hypotheses, a questionnaire based on the scenario was used. This questionnaire is based on Green (2015). The statistical population consists of all active financial analysts in investment companies and stock exchange brokers and the statistical sample of the study was determined using the sample size tables of Cohen et al. (2000) of 268 people. Multivariate analysis of variance (MANOVA) and univariate analysis of variance (ANOVA) were used to analyze the data and test hypotheses.
4- Results
The results of this study showed that conservatism and its interaction with the fair value volatility have a significant effect on the investment selling decisions based on fair value. However, the fair value volatility has no significant effect on these decisions. The other results showed that financial analysts' demographic characteristics do not have a significant effect on investment decision-making. Overall, the results of the research showed that the directors' discretions in fair value accounting affects investment selling decisions.
5- Discussion and conclusion
Findings of the research indicate that with the increase in the level of conservatism used in the assessment of fair value, managers' willingness to sell investments increases. This result is consistent with the motivated reasoning and the prospect theory. The results of this study are consistent with the results of Green (2015). In addition, the results of the research showed that the historical volatility of fair value does not affect the decision of investment sales. This result is not consistent with agency theory and prospect theory, but is consistent with the results of Green (2015). The sensitivity analysis of this result suggests that, the increase in the fair value volatility, the asking sales price and the probability of sales below the current fair value has not increased and did not reduce the lowest acceptable price.
Keywords: Manager Discretion, Conservatism, Fair Value Volatility, Investment Selling Decisions.