Identifying and Ranking Factors Affecting Earnings Response Coefficient

Document Type : Original Article

Authors

• Seyed Mohsen Mousavi ¹
• Meysam Arabzadeh ²
• Mohamad Alipoor ³
• Omid Faraji ⁴
• Aliakbar Farzinfar ⁵

¹ accounting department, Islamic Azad University, Kashan Branch, Kashan, Iran.

² Department of Accounting, Kashan Branch, Islamic Azad University, Kashan,Iran

³ accounting department, Islamic Azad University, Khalkhal Branch, Khalkhal, Iran

⁴ faculty of management and accounting, University of Tehran, College of Farabi, Qom, Iran

⁵ accounting department, Islamic Azad University, Kashan Branch, Kashan, Iran

10.22067/ijaaf.2022.42037

Abstract

One of the most critical questions after financial statements is why market responses differ from companies with almost similar statements. This research aims to answer this question by identifying factors affecting the earnings response coefficient. In this research, all of these factors were identified, classified, and ranked for the first time in Iran. The researchers carried out the research using Fuzzy Delphi in two phases, and Shannon's Entropy was done. The cross-sectional method was used, and the data were collected over several weeks. The statistical population included 40 experts who have been active in the Iranian capital market for many years. The results revealed that 46 factors directly influence the earnings response coefficient in Iran. Finally, these factors were classified into five categories: the company’s financial features and financial reporting, the company’s market share, auditing quality, corporate governance, and environmental factors, then ranked with the aid of Shannon’s Entropy.

Keywords

• Financial Reports
• Earnings Response Coefficient
• Investors’ Behavior
• Capital Market Response

---

©2022 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0).

References

1. Al-Awawdeh, H., al-Sakini, M. and Nour, M. (2020). Factors affecting earnings response coefficient in Jordan: applied study on the Jordanian industrial companies. Investment Management and Financial Innovations, 17(2), 255-265.
http://dx.doi.org/10.21511/imfi.17(2).2020.20.
2. Ariff, M., Fah, C. F. and Ni, S. W. (2013). Earnings response coefficients of OECD banks: Tests extended to include bank risk factors. Advances in Accounting, 29(1), pp. 97–107. https://doi.org/10.1016/j.adiac.2013.03.003.
3. Azar, A. (2001). Extending and Developing the Shanon Entropy for Data Process in Content Analysis. Journal of Humanities, 11(37-38), pp. 1-18. https://www.sid.ir/en/journal/ViewPaper.aspx?id=21699.
4. Ball, R. and Brown, P. (1968). An Empirical Evaluation of Income Numbers. Journal of Accounting Research, 6(2), pp. 159-178. https://doi.org/10.2307/2490232.
5. Behbahaninia, P. S. and Mashayekhi, B. (2016). Explanatory Model of Earnings Response in Iran. Journal of Audit Science, 16(63), pp. 63-88 (In Persian).
6. Bojadziev, G. and Bojadziev, M. (2007). Fuzzy Logic for Business, Finance, and Management, World Scientific Publishing Company, Singapore
7. Cheng, J. H., Lee, C. M. and Tang, C. H. (2009). An Application of Fuzzy Delphi and Fuzzy AHP on Evaluating Wafer Supplier in Semiconductor Industry. WSEAS Transactions on Information Science and Applications, 6(5), pp. 756-767.
8. Collins, D. W. and Kothari, S. P. (1989). An Analysis of Intertemporal and Cross-sectional Determinants of Earnings Response Coefficients. Journal of Accounting and Economics. 11(2-3), pp. 143–181. https://doi.org/10.1016/0165-4101(89)90004-9.
9. Danier Paramita, R. W., Fadah, I. K., Tobing, D. S. and Suroso, I. (2020). Accounting Earnings Response Coefficient: Is the Earning Response Coefficient Better or Not. Journal of Asian Finance, Economics and Business. 7(10). Pp. 51-61.
https://doi.org/10.13106/jafeb.2020.vol7.no10.051.
10. Ebrahimi Sarve Olia, M., Babajani, J., Hanafizadeh, P. and Ebadpour, B. (2017). Assessment of the behavioral determinants of individual investors in the Tehran Stock Exchange based on structural equation modeling. Journal of Investment Knowledge, 6(22), pp. 131-145 (In Persian).
11. Forouzandeh, J. Izadinia, N. and Daei Karimzadeh, S. (2020). The Effect of Audit Report Type and Audit Report Paragraphs on Abnormal Stock Return Using Earnings Response Coefficient Model. International Journal of Finance and Managerial Accounting. 5(19).143-150 (In Persian).
12. Gajewski, J. F. and Bertrand, P. Q. )2013). A Comparison of the Effects of Earnings Disclosures on Information Asymmetry, Evidence from France and the U.S. The International Journal of Accounting, 48(1), pp. 1–25. https://doi.org/10.1016/j.intacc.2013.01.004.
13. Hakimipour, N. (2017). Determinants of the ERC in the Tehran Stock Exchange. Journal of Financial Economics, 10(37), pp. 111-125 (In Persian).
14. Kahraman, C. (2008). Fuzzy Multi-Criteria Decision Making: Theory and Applications with Recent Developments. Springer US. New York, United States. https://doi.org/10.1007/978-0-387-76813-7.
15. Penman, S. H. (1992). Return to fundamentals. Journal of Accounting, Auditing, and Finance, 7(4), pp. 145-181. https://doi.org/10.1177/0148558X9200700403.
16. Rahmani, A., Vaziri Nezhad. R., Ahmadi Nia, H. and Rezaeian, M. (2020). Methodological Principles and Applications of the Delphi Method: A Narrative Review. Journal of Rafsanjan University of Medical Sciences, 19(5), pp. 515-538. https://doi.org/10.29252/jrums.19.5.515.
17. Scott, W. (2006). Financial Accounting Theory. 4thed. McGraw-Hill Australia, New York, United States.
18. Takamatsu, R.T. and Lopes Fávero, L.P. (2019). Financial indicators, informational environment of emerging markets and stock returns. RAUSP Management Journal, (54)3, pp.253-268. https://doi.org/10.1108/RAUSP-10-2018-0102.
19. Tehrani, M. and Khoshnoud, M. (2005). Identification of Effective Groups on Stock Sale and Purchase in Tehran Stock Exchange. Organizational Culture Management, 3(3), pp. 203-219 (In Persian).
20. Vakilifard, H. R. Saeedi, A. and Eftekhari Ali Abadi, A. (2013). Investigating the Earnings Response Coefficient in Tehran Stock Exchange. Financial Knowledge of Securities Analysis, 6(18), pp. 115-123 (In Persian).
21. Wijaya, H., Adhitya, S., Cahyadi, H. and Salim, S. (2020). Factors Affecting Earning Response Coefficient with Profitability as Moderating Variable in Manufacturing Companies. Advances in Economics, Business and Management Research. https://doi.org/10.2991/aebmr.k.200626.044.
22. Wu, C. H., and. and Fang, W. C. (2011). Combining the Fuzzy Analytic Hierarchy Process and the fuzzy Delphi method for developing critical competencies of electronic commerce professional managers. Quality & Quantity, 45, pp. 751-768. https://doi.org/10.1007/s11135-010-9425-6.
23. Yahyazadehfar, M., Zali, M. R. and Shababi, H. (2009). Determinants of Investors Financial Behavior in Tehran Stock Exchange. Iranian Economic Review, 14(23), pp. 61-77. https://doi.org/10.22059/IER.2009.32674 (In Persian).