The Relationship between Financial Reporting Quality and Corporate Performance: Evidence from Iran

Document Type : Accounting

Authors

• Mahmoud Lari Dashtbayaz
• Marzieh Hedayatipour
• Homa Molavi

Department of Accounting, Ferdowsi University of Mashhad, Iran

10.22067/ijaaf.v2i2.72064

Abstract

The relationship between financial reporting quality and corporate performance in the imperfect Iranian market is very important for investors, such that one of the main concerns of shareholders is to be informed about corporate performance. On the other hand, information is provided to stakeholders through financial reports and facilitates investment decisions. The aim of this study is to evaluate the effects of financial reporting quality on corporate performance in Iran where this relationship between financial reporting quality criteria and corporate performance has not been investigated yet. In order to test these relationships, 80 listed companies on the Tehran Stock Exchange during the period 2006 - 2014 were studied and analyzed. In this study, three separate methods (contingent income, accrual items, and accruals quality of working capital) and a composite method used to evaluate the quality of financial reporting and in order to calculate the corporate performance, we used the economic and market value added. The results show that the improvement of reporting quality increases the economic value added according to Dechow and Dichev (2002) models. No relationship found between different criteria of financial reporting quality and the market value added. The aim of this study is to evaluate the effects of financial reporting quality oncorporate performance in Iran. To test hypotheses, data of all listed companies on the Tehran Stock Exchange were analyzed during a period from 2008-2016. In this study, three separate methods (contingent income, accrual items, accruals quality of working capital) used to evaluate the quality of financial reporting and in order to calculate corporate performance, we used the economic and market value added.The results show that the improvement of reporting quality increases the economic value added according to Dechow and Dichev(2002) models. No relationship found between different criteria of financial reporting quality and the market value added.

Keywords

• Financial reporting quality
• corporate performance
• Tehran Stock Exchange

---

References

Almeida, H., and Campello, M. (2007). Financial Constraints, Asset Tangibility, and
Corporate Investment.The Review of Financial Studies, Vol 20, (5), pp. 1429 -
1460. DOI: 10.1093/rfs/hhm019.
Andreas, B.,Weiben, B., and Blome, M.(2003). Is Market Value-Based Residual
Income a Superior Performance Measure Compared to Book Value-Based Residual
Income, http://wiwi.uni-giessen.de/controlling/
AghorlyiKhani, R. (2005). The relationship between economic value added EVA
and return on common stock listed companies in the pharmaceutical and
chemical industry Tehran Stock Exchange, completed a master of Analytical
Chemistry. Faculty of Science, University of Tehran Zahra.
Ardestani, M. (2007). Relationship Between the Quality of Financial Reporting and
Ownership Fees, Master's Degree in Accounting; AllamehTabataba'I
University.http://dl.islamicdoc.com/site/catalogue/578062
Biddle, G., Hilary, G., and Verdi, R.S., (2009). How does financial reporting quality
relate to investments efficiency? Journal of Accounting and Economics, Vol.
48, No. (2-3), pp. 112–131. DOI: 10.1016/j.jacceco.2009.09.001.
Bushman, R.M., and Smith, A.J. (2001). Financial accounting information and
corporate governance. Journal of Accounting and Economics, Vol. 32, (1-3),
pp. 237–333.https://doi.org/10.1016/S0165-4101(01)00027-1
Dechow, P., and Dichev, I. (2002). The quality of accruals and earnings: the role of
accrual estimation errors.The Accounting Review, Vol. 77, (1), pp. 35–59.
https://www.jstor.org/stable/3203324
Dechow, P., Ge, W., and Schrand, C. (2009). Understanding earnings quality: A
review of the proxies, their determinants and their consequences.Journal of
Accountingand Economics, Vol. 50, (2-3), pp. 344-401.DOI:
10.1016/j.jacceco.2010.09.001
Diamond, D.W. (1991). Debt maturity structure and liquidity risk. Quarterly Journal
of Economics, Vol. 106, (3), pp. 709–
737.https://www.jstor.org/stable/2937924
Foroughi, B.,KhairlAnuar, M.Sh.,Nikbin, D., and Sean Hyun, S. (2014). The im-
pact of event quality on fan satisfaction and game attendance in the context of
professional soccer in Iran. International Journal of Sports Marketing and
Sponsorship, Vol. 15, No. 3, pp. 40-56. DOI: 10.2308/ajpt-51819
Garven, S., Beck, A. Parsons, L. (2017). Are Audit-Related Factors Associated with
Financial Reporting Quality in Nonprofit Organizations?American
Accounting Association, Vol. 37, (1), pp. 49-68. DOI: 10.2308/ajpt-51819
Ghazinoory,S.,Khorasania, A., and AnvariRostamya, A.A. (2016). Performance
Evaluation of Information and Communication Technology Corporations in
Tehran Stock Market: Inconsistency with the Global Trend.Journal of
Information Technology management, VOL. 29, (1), pp. 147-164, DOI:
10.22059/jitm.2013.30055
Gitman, L.J., and Goodwin, M.D. (1979). An assessment of marketable securities
management practices”, The Journal of Financial Research, Vol. 11, (2), pp.
161-169. DOI: 10.1111/j.1475-6803.1979.tb00028.x
Hashemi, A.,Samadi, S., and Hadian, R. (2014). The effect of financial reporting
quality and maturity of debt on investment performance.Empirical studies in
Financial Accounting Quarterly, Vol. 11, (44), pp. 143-
117.http://qjma.atu.ac.ir/article_1095_en.html[in Persian]
Hejazi, R. and Hosseini, A. (2006). Compare the relationship between the market
and economic value added with accounting criteria on the Tehran Stock
Exchange. Economics Research, Vol. 6, (4), pp. 237-
262.https://www.sid.ir/fa/journal/ViewPaper.aspx?id=54319[in Persian]
Hemati, H.,Kazemi, H., and Babaei, F. (2013). Evaluation of partial and differential
information content of economic value added, accounting earnings and operating
cash flow and return on equity”. New research in accounting, Vol. 1, (2),pp. 49-
57. http://journals.pnu.ac.ir/article_1696.html[in Persian]
IASB. (2008). Exposure Draft on an Improved Conceptual Framework for Financial
Reporting: The Objective of Financial Reporting and Qualitative Charac-
teristics of Decision-useful Financial Reporting Information, London.
Jaggi, B., and Leung, S. (2007). Impact of Family Dominance on Monitoring of
Earnings Management by Audit Committees: Evidence from Hong Kong.
Journalof International Accounting, Auditing and Taxation, Vol. 16, (1), pp.
27-50.DOI: 10.1016/j.intaccaudtax.2007.01.003
Jahankhani, A.,and Zareeffard, A. (1995). Do managers and shareholders used the
appropriate criterion to measure the performance of the company and Its
value. Financial Research Journal, Vol. 2, (7), pp. 90-65.
https://jfr.ut.ac.ir/article_26071.html [in Persian]
Jain, A.K., and Mareno, A. (2015). Organizational learning, knowledge manage-
ment practices and firm’s performance.The Learning Organization, Vol. 22,
(1), pp. 14-39. DOI: 10.1108/TLO-05-2013-0024
Kasznik, R. (1999). On the association between voluntary disclosure and earnings
management.Journal of Accounting Research, Vol. 37, (1), pp. 57–81.
https://www.jstor.org/stable/2491396
Khajavi, Sh., And Nazemi, A. (2005). Investigating the relationship between
earnings quality and stock returns with emphasis on the role of accrual
variables in Tehran Stock Exchange. Journal of Accounting and auditing
reviews, Vol. 12, (2), pp. 37-60.
https://acctgrev.ut.ac.ir/article_10476.html[in Persian]
Kordestani, Gh., and Bagheri, M. (2009). The relationship between the economic and
the cash value is added at a profit forecast error.Journal of Accounting
Research, Vol. 1, (1), pp. 147-
130.https://www.sid.ir/Fa/Journal/ViewPaper.aspx?ID=106545[in Persian]
McNichols, M., and Stubben, S. (2008). Does earnings management affect firms’
investment decision? The Accounting Review. Vol. 86, (6), pp. 1571–1603.
DOI:10.2308/accr.2008.83.6.1571
Martinez-Ferrero, J. (2014). Consequences of financial reporting quality on
corporate performance. Evidence at the international level.Estudios de
Economia, Vol. 41, (1), pp. 49-88. DOI: 10.4067/S0718-
52862014000100002
Mashayekhi, B., and Mohammad pour, F. (2014). Quality financial reporting, debt
maturity and investment performance”, financial management strategy, Vol. 2,
(7), pp. 14-1. http://ensani.ir/file/download/article/20151125180222-9963-43.
p d f [in Persian]
McNichols, M., and Stubben, S. (2008). Does earnings management affect firm’s
investment decisions? The Accounting Review, Vol. 83, (6), pp. 1571–1603.
https://www.jstor.org/stable/30243807
Nouravesh, I., Salehi, F., and Carimi, G. (2004). Investigate the relationship between
operating cash flows, operating profit and economic value to the wealth
created for shareholders.Journal of Accounting and Auditing Reviews, Vol.
11, (3), pp. 121-146. https://acctgrev.ut.ac.ir/article_10462_en.html [in
Persian]
Olanisebe, M. B.,Ekundayo, O., and Adeyemo, L. (2018).Independent auditor
modeling on the financial reporting quality of related banks in Nigeria. Asian
Journal of Multidisciplinary Studies, Vol. 6, (4), pp.1-7.
Poornima, B.G., Narayan, P., and Reddy, Y.V. (2015). Economic Value-Added as an
Emerging Tool of Performance Measurement: Evidence from Indian
Companies”, IUP Journal of Accounting Research & Audit Practices, Vol.
14, (3),38-48.
https://www.researchgate.net/publication/286732211_Economic_Value_Add
ed_EV
A_as_an_Emerging_Tool_of_Performance_Measurement_Evidence_fro
m_Indian_Companies
Shariat, N., and Ketabi, S. (2016). Evaluating the Performance of Top Companies
Listed on Tehran Stock. Exchange and Selecting the Optimal Investment
Portfolio.International business management, Vol. 10, (7), pp. 1207-
1214.http://lib.khuisf.ac.ir/site/catalogue/494786?_afPfm=fkdot1tnh[in
Persian]
Simon, J. (1999). Company Valuation and Performance Measurement.
www.accaglobal.com.
Stern, J.M., and Shiely, J.S. (2001).The EVA Challenge”, New York, Wiley &Sons,
Inc.ISBN-13: 978-0471478898
Stewart, G. B. (1991).The Quest for Value, A Guide for Senior Managers. New
York Harper Collin Publisher, pp. 119-222.
https://trove.nla.gov.au/work/6651102
Tariverdi, Y., and Keivanfar, M. (2017). The Effect of Financial Constraints on
Relationship between Financial Reporting Quality and Investment
Inefficiency.International Journal of Economics and Financial Issues, Vol.
7(5), pp. 161-168. [in Persian]
Worthington, A., and West, T. (2004) Australian Evidence Concerning the
Information Content of Economic Value Added. Australian Journal
ofManagement, Vol. 29, (2), pp. 201-242.DOI:
10.1177/031289620402900204
Xia, F., and Walker G. (2014). How much does owner type matter for firm
performance? Manufacturing firm in china 1998-2007.Strategic
ManagementJournal, Vol. 36(4), pp. 576-585.DOI: 10.1002/smj.2233
Yahyazadefar, M.,Abonouri, E., and Abadian, M. (2009). The relationship between
economic value added and profitability ratios with the market value of stocks
of the automobile industry and parts manufacturing firms in Iran.Quarterly
Journal of the Stock Exchange, Vol. 2, (6), pp. 91-115. [in Persian]