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Special Issue INTERNATIONAL JOURNAL OF HUMANITIES AND January 2016 CULTURAL STUDIES ISSN 2356-5926

Investigating the Effect of Conservatism at the Time of Initial on -Term Returns of Listed on the Tehran

Dariush Javid * Assistant professor of Islamic Azad University of Boroujerd

Nosrat Ahmadi MA Student of Accounting, Islamic Azad University E-mail: [email protected]

Abstract

Initial public offering is an important event in the life cycle of a and also one of the financial phenomena that various studies and different opinions about that have been done all over the world. The purpose of this study is to evaluate the effect of conditional and unconditional conservatism at the time of on long-term stock returns of companies listed on the Stock Exchange of Tehran. The research time territory is from 2002 to 2014, respectively. It was used of Eviews econometric software for data analysis and for hypothesis testing was used of multivariate regression model (logistic regression). The results showed no significant relationship between both conditional and unconditional conservatism in the initial public offering on long term returns of shares in companies listed on the Stock Exchange of Tehran.

Keywords: returns of shares- initial public offering – conservatism.

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Special Issue INTERNATIONAL JOURNAL OF HUMANITIES AND January 2016 CULTURAL STUDIES ISSN 2356-5926

Introduction Initial public offering is an important event in the life cycle of a company and also one of the financial phenomena that various studies and different opinions about that have been done all over the world. are always looking for good opportunities to obtain - term returns, which is why the early days of the issuance of can be a good opportunity for investors in all capital markets all over the world. Every year, many companies by offering their shares to the public through the , provide their financial needs. But these companies think less and make less decision about their low priced stocks or availability of unusual short-term returns which is the income of their investors. According to this fact, earning abnormal positive returns is the interest of buyers and the disadvantage of the previous owners who attempted initial public offering (Yaghoobnezhad and Tajik Nia, 2010). The purpose of financial statements is making the possibility of economically beneficial decisions by their users. Users need information that is reliable enough and relevant enough, but the balance between these two characteristics is discussable. Conservatism is a factor that can influence both the relevance and reliability of the information, and if these two properties change, the power to decide who rely on the financial information will be also changed. The users want information that in addition to being effective and relevant to their economic decisions, it also should be accurate and without important unbiased tendencies and honestly express what is claimed or expected to be. Due to the importance of financial reporting in the decisions of consumers and the impact that conservative procedures have on the financial statements and decisions of company and therefore making conservative approach can affect corporate financing activities (Jimmy Lee 1 , 2011). In this regard, the present study examined the relationship between conditional and unconditional conservatism at the time of the initial public offering and changes in long-term stock returns of companies listed on the Stock Exchange of Tehran. It also tries to answer the question of whether the conditional and unconditional conservatism at the time of the initial public offering will have a long term effect on returns or not.

A Review of the Literature Foreign Literature Cho and Lee (2013) examined the relationship between research costs and development on lower pricing of initial public offerings in the single industry of South Korea. Their study included 591 South Korean stock companies from the year of 2001 to 2008. The results showed that these companies are less making pricing over other companies. Sirada & kriengkrai (2013) in an article entitled conservative accounting and investment opportunities in the future, arguing that conservative accounting by reducing the information asymmetry between investors and managers led to the improvement of opportunities for investors. The relationship between conservative accounting and investment opportunities was in the period of 2005-2011. The study shows that conservative has significant positive relationship with investment opportunities in the future; it represents an important informational role of conservatism in reducing the cost of units. Chen and Su 4 (2013) investigated the indirect property investments in investee companies on the cost of and

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accounting conservatism role in reducing the cost of debt. They point out that in the companies that their investment structure is complex in them, agency costs and information asymmetry between and creditors is high. They believe that the interests and contrast of shareholders and creditors in such companies are high and the cost of debt is also high. They found that accounting conservatism in companies with a layer of indirect investment will reduce the cost of debt. Heydari 5 (2012) examined the control of on the long-term returns of initial public offering in the Malaysian firms. He studied 157 Malaysian companies from 2007 and 2010, verified the positive and weak impact of corporate governance controls and a strong positive impact of returns of earnings on long-term of Malaysian companies that have initial public offering. Ruch & Taylor 6 (2011) reviewed the conducted research in the field of accounting conservatism with different findings about the usefulness of conservatism accounting in improving the quality of financial statements. Such that the conservatism of accounting, through the creation of accounting reserves such as the store of doubtful studies would be of benefit management. But on the other hand, they concluded that conservatism can reduce information asymmetry and improve transparency in the disclosure of financial statements. Their results show that accounting conservatism can be used as a default efficient mechanism to prevent conflicts of interest between managers and shareholders, creditors, shareholders and presents. UnyongPyo et al 7 (2011) in his review entitled by investment lower than the problems of information asymmetry through debt ratio, concluded that, companies that have with high risk, when investment opportunities on the ratio of debt are measured, they cannot have profitable investments, on other hand, they showed that the debt ratio could have solution to solve problems of having less investment despite debt risk and asymmetric information. Lara et al 8 (2011) in a study entitled by conditional conservatism and the is arguing that conditional conservatism is a control mechanism that is useful for both creditors and investors and increases the value of the company. The relationship between conditional conservatism and stock return over the period from 1975 to 2003 were studied. They found there was a significant relationship between these two components. Lee 9 (2010) the conservatism role of accounting in corporate financial decisions will be examined. He showed that companies with higher accounting conservatism have less flexibility in liquidity management and decisions related to issue stock. Totally his findings show that although using conservative financial reporting, companies are getting advantages from the reducing costs related to debt contracts, so their flexibility in terms of access to capital, reduced and that these are effective on financial decisions. Manuel, 10 (2009), in a research entitled by examining the impact of accounting information in the consequences of conservative accounting in the financial analysis of conservative creditors and investors claimed that conservative accounting by improving the information content of firm by reducing agency problems associated with information asymmetry reduces the uncertainty about the information structure of Company. These researchers by examining the samples from 1976 to 2006 concluded that increased levels of conservatives led to reduction

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in information asymmetry, stock return , credit risk and the expected costs and also increase the accuracy of analysts' forecasts. Chi et al 11 (2009) in a study entitled by the relations of corporate governance with conservatism by the use of Khan and Watts model (2007) and the information of exchange companies in Taiwan from 1996 to 2004 concluded that in companies that most of their stocks are in hands of institutional shareholders, so they require less conservative accounting. Schindele & Perotti12 (2002) in an article titled pricing initial public offering in the immature capital markets, case study of Hungary, by defining the characteristics of the privatization program in Hungary they also check pricing of underpricing of initial public offerings in the shares market and considered them as a political motivation. Local History Abbasi et al (1393) examined the impact of accounting conservatism on the risk of falling stock prices in terms of information asymmetry with the sample of 124 companies in during the period of 2008 to 2012. The findings suggest that conservatism is the possibility of falling stock prices, and it is lower toward when there is no possibility of falling stock prices. Ansari et al (2014) conducted a study titled by the investigation of the effect of conservatism on returns management based on accrual, real earnings and profits management and the overall level of earnings management in listed companies in Tehran Stock Exchange. The sample consisted of 135 companies listed in Tehran Stock Exchange during the years of 2007 to 2012. In this study, there is a negative correlation between conservatism and accrual-based earnings management, and a positive relationship between conservatism and real profit management. Also in this study, the influence of conservatism on the overall level of earnings management was examined and a negative correlation between conservatism and the general level of earnings management has been proven. Bulow et al (2014) compared the short and long-term performance of initial public offerings of involved companies in policies of Article 44 of the constitution with other initial public offerings and the efficiency of markets. The results showed that short-term return stocks of companies is higher in the market so with short-term returns of other basic supplies has no significant difference. Also, long-term stock performance of state-owned companies as part of Article 44 of the constitution which is implemented to the public have been positive and is more than the other long-term basic supply efficiency, so it has no significant difference with long- term market returns. Kordestani and Iranshahi (2013) investigated the impact of conservatism on the relevance of accounting information on stocks, by using information from listed companies in Tehran Stock Exchange in the period from 2004-2010 found that the value relevance of accounting information to stock companies has no significant difference with higher and lower grade. In other words degree of conservatism in Companies has no impact on the information content of accounting numbers. They also found that through the implementation of additional tests companies provide more relevant information with moderate and high-grade conservative. Hashemi and Khaleghi (2012) examined the impact on the accuracy and frequency of conservative earnings forecast of listed companies in Tehran Stock Exchange in 2003 to

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2007. Research findings indicate that the profit forecast has inverse relationship with accounting conservatism. Thus, we can conclude that with increasing conservatism level, the levels of earnings forecast will be reduced. But about the relationship between conservatism and earnings forecast accuracy, any evidence was not found. Ghalibaf and colleagues (2013) examined the relationship between pricing less than the normal level and stock liquidity after the initial public offering in the companies listed in Tehran's Stock Exchange. In line with this review, the financial information required 80 qualified initial public offering and samples were collected between the years of 2002-2010. The results showed that after controlling other factors affecting the liquidity in the initial public offering of lower level price, the initial has positive relationship with the trading volume and negative relation with criteria of lack of liquidity. Rahmani et al (2012) examined the relationship between main ownership and earnings conservatism. In this study was used of 56 eligible companies in the period of 2005 to 2009. The results demonstrate significant negative relationship between the ownership of shareholders controllers and conservatism in profits. This result is consistent with the reduction of external contracting. In addition, there is negative relationship between this divergence and earnings conservatism. When this difference increases, company faces with higher costs of external contracting. Modares and Asgari (2010) conducted a study titled by identifying the factors affecting the long-term abnormal returns of initial public offering in Tehran Stock Exchange. The results of the analysis of data indicate national positive abnormal returns, 24 months after the IPO companies in Tehran Stock Exchange. Among nine variables, age and size of company, time horizon of lifetime share earnings forecast, , of profit, general market conditions before the offering, the prediction error earnings of each share, types of audit firm, only three variables of audit firm, firm size and prediction error had a significant relationship with abnormal return. But in general multivariate regression analysis showed that variables can simultaneously justifying almost 20 percent of the abnormal return. Mehrani and colleagues (2010) in a research checked the presence of abnormal returns in stock of initial public offerings in Tehran Stock Exchange in the presence and absence of speculative bubbles and factors affecting it. Results suggested the presence of short-term abnormal returns over the long term in stock of initial public offerings in the capital markets of Iran in the absence of price bubbles and also the presence of short-term abnormal returns in terms of price bubble in Initial Public Offerings. Nasrollahi et al (2010) in his study evaluated the performance of shares of privatized companies through the stock exchange by examining stock returns, before and after privatization they came to conclusion that there is a significant difference between stock returns of privatized companies, before and after privatization. Hypotheses According to the above-mentioned topics and research background, research hypotheses have been formulated as follows: First hypothesis: there is a significant relationship between conditional conservatism provided at the time of the initial public offering and long term return of stock.

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The second hypothesis: there is a significant relationship between the unconditional conservatism at the time of the initial public offering and efficiency.

Methodology This study in terms of the correlation and research methodology is quasi-experimental and post-event based on the research proving accounting, which is conducted by real information and as it can be used in the process of using information therefore, it is an applied research. The study is based on real information, financial statements, explanatory notes and report of enterprises. In this research with direct obtaining of the survey required data for financial statement, thoughtful database, new achievements and Exchange Organization site, the total data collected is needed to test the hypothesis. After the selection of sample firms in order to carry out calculations, Excel software was used. In data analysis, multivariate linear regression models were used and to analyze the data, econometric software of Eviews version 8 was used.

The Statistical Population and Sampling Method The population for this study consisted of all IPO companies (companies listed on Tehran Stock Exchange at the time of the initial public offering) and the study period is from 2002 to 2014, respectively. So, in a way that was used of the IPO companies that their shares were listed on the TSE board from 2002 to 2008, and for each company was used of historical and financial fiscal year information of shares for 5 years after that. In this study, for sampling was used of purposive sampling (systematic elimination). Based on this view, all population companies that have chosen the following conditions have been selected and others have been removed. 1. For the purpose of comparability of information, the fiscal year ended at 29 March. 2. They should not be a part of financial companies (such as banks, insurance companies) and investment companies. 3. During the period under review, they should not have the change in the fiscal year. 4. Information on the selected variables should be available. Given the circumstances, it was considered that the sample size was over 81 companies.

Regression models In this research was used of Regression Model for Testing Hypotheses:

Relationship (1)

∆푅푖푡 = 훽0 + 훽1퐶푂푁푆_퐶푖푡 + 훽2퐴푢푑푂푟푔푖푡 + 훽3퐿푛푆푖푧푒푖푡 + 훽4푈푛푒푑푟푃푟푖푐푖푛푔푖푡 + 훽5푂푓푓푒푟푃푟푖푐푒푡 + 훽6퐵푀푖푡 )1( + 훽7퐿푁(1 + 푎푔푒)푖푡 + 훽8퐿푒푣푖푡 + 훽9푅푂퐴푖푡 + 훽10 퐴푏푠(퐶퐹푂)푖푡 + 휀푖 Relationship (2)

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Special Issue INTERNATIONAL JOURNAL OF HUMANITIES AND January 2016 CULTURAL STUDIES ISSN 2356-5926

∆푅푖푡 = 훽0 + 훽1퐶푂푁푆_푈퐶푖푡 푖푡 + 훽2퐴푢푑푂푟푔푖푡 + 훽3퐿푛푆푖푧푒푖푡 + 훽4푈푛푒푑푟푃푟푖푐푖푛푔푖푡 + 훽5푂푓푓푒푟푃푟푖푐푒푡 + 훽6퐵푀푖푡 )2( + 훽7퐿푁(1 + 푎푔푒)푖푡 + 훽8퐿푒푣푖푡 + 훽9푅푂퐴푖푡 + 훽10 퐴푏푠(퐶퐹푂)푖푡 + 휀푖

In which: ΔR: if the stock return of IPO company after 5 years of activity in Exchange decreases, the number is 1 or Zero. CONS_C: conditional conservatism is indicated is measurable by the following equation (Giuli model and Hine, 2000): relationship 3 퐶푂푁푆 − 퐶 푂푝푒푟푎푡푖푛푔 푝푟표푓푖푡 + 푑푒푝푟푒푐푖푎푡푖표푛 푐표푠푡 − 표푝푒푟푎푡푖표푛푎푙 푐푎푠푕 푓푙표푤 = 푡표푡푎푙 푎푠푠푒푡 × (−1)

CONS_UC: indicated the unconditional conservatism and is measurable by the following equation (Giuli model and Hine, 2000): Relationship 4 푆푡표푐푘 푕표푙푑푒푟푠 표푓 푏표표푘 푣푎푙푢푒 퐶푂푁푆 − 푈퐶 = × (−1) 푠푡표푐푘 푕표푙푑푒푟푠 표푓 푒푥푐푕푎푛푔푒 푚푎푟푘푒푡 If the audit has been by the IPO Audit, the number is 1 or zero. LnSize: indicates the size of the company that can be determined through natural logarithm of market value. UnderPricing: the percentage difference between the final price and the price offered for the first day of the exchange. OfferPrice: bids on the first day of the exchange. BM: by dividing the and the market value of equity is obtained. [Ln (1 + age)]: indicates the age of the company and the difference between the date established company and obtained IPO date. Lev: acquired by dividing the company's total debt (short and long term) on total assets of the company. ROA: Indicates the return on assets that is calculated by dividing operating profit by total assets. [Abs (CFO)]: indicates the absolute value of cash flow operations.

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Results Descriptive Statistics Summary characteristics of the variables used in this research are presented in the form of descriptive statistics in table 1, related to the research data. Reported statistics are included factors such as mean, median, maximum, minimum, and standard deviation for each variable used in the research. PD (1) descriptive statistics of variables for the sample companies Variables Number Minimum Max. Middle Average The of standard Views deviation ΔR 405 0.518519 1.000000 1.000000 0.000000 0.500275 CONS_C 405 -0.02782 -0.01277 0.581922 -0.88676 0.146946 CONS_UC 405 -0.51928 -0.41494 0.401606 -1.96078 0.391850 AUDORG 405 0.333333 0.000000 1.000000 0.000000 0.471988 SIZE 405 26.89104 26.64835 32.74145 23.24378 1.814763 UNDERPRICING 405 -0.14688 -0.111 0.968312 -0.99919 0.443646 OFFERPRICE 405 8669.704 000.6000 45647.00 1000.000 8537.947 BM 405 0.405277 0.351351 0.980392 0.010101 0.252070 AGE 405 19.25926 16.00000 62.00000 2.000000 12.53093 LEV 405 0.567528 0.588726 0.976815 0.003013 0.209604 ROA 405 0.199863 0.182831 0.985620 -0.33046 0.151247 ABSCFO 405 650,756.2 52741.00 19754886 0.000000 2362457.

That: ΔR: If stock returns reduced after 5 years, the number is 1 or zero, CONS_C : Conditional conservatism, CONS_UC : Unconditional conservatism, AUDORG: If auditory conducted by the auditor company the number is one or zero, SIZE: The size of the company, UNDERPRICING: The percentage difference between the final price and the price offered for the first day of the exchange, OFFERPRICE: Bids on the first day of the exchange, BM: Book value of equity divided by the market value of equity, AGE : The age of the company (difference between date of establishment and the date of entry into stock) LEV: Total debt divided by total assets, ROA: Return on assets, ABSCFO: absolute value of operating cash flows.

Hypothesis Testing The first hypothesis examines the relationship between Conditional conservatism and long term return on the initial public offering of stock Companies accepted in Tehran stock Exchange. As can be seen from Figure 2 the coefficient of conditional conservatism (CONS_C), is equal to 1.259, respectively. According to the statistic Z and p-Value of this variable, these coefficients indicated the meaningless results in the error level of 5 percent. These findings indicate that the

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coefficient of Conditional conservatism has no significant relationship with long-term stock returns of IPO Companies. As a result, the null hypothesis is confirmed. Figure 2: Results of combination regression Z statisti Type of Variable Coefficient SD PROB c Relationship Constant 2.41971 Significant factor 5.999603 2.479465 7 0.0155 positive - CONS_C 1.58019 Meaningless -1.259523 0.797067 8 0.1141 - AUDORG 1.18726 Meaningless -0.289773 0.244069 1 0.2351 - Significant SIZE 2.37467 negative -0.217723 0.091685 7 0.0176 - UNDERPRICIN 0.08466 Meaningless G -0.023851 0.281706 7 0.9325 2.40149 OFFERPRICE Significantpositive 3.41E-05 1.42E-05 5 0.0163 - BM 0.02532 Meaningless -0.011968 0.472582 5 0.9798 1.69880 AGE Meaningless 0.015668 0.009223 3 0.0894 - LEV 0.22421 Meaningless -0.120197 0.536071 9 0.8226 - Significant ROA 2.37931 negative -2.251737 0.946381 5 0.0173 - ABSCFO 1.31269 Meaningless -2.85E-07 2.17E-07 3 0.1893 The The Obswit SD Obswit coefficient of Statistic probabilit h dependen h Dep= determinatio s LR y statistic Dep = t var 0 n McFadden LR 1 Statistics 0.107 0.5 60.285 0000 195 210

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According to the results of the test model and as can be seen in Figure 2 which shows the amount of P-Value of LR statistics that indicate significance of total regression, which is equal to 0.000 and showed that the model is significant at 99 per cent level respectively. The coefficient of determination percentage of Fabricated R2 (McFadden) is equal to 0.107. The second hypothesis explores the relationship between unconditional conservative in the initial public offering and long term return shares in the company accepted in Tehran Exchange. As can be seen in the figure 3, the coefficient of conditional conservatism (Cons_Uc), is equal to - 0.257. According to the statistic Z and p-Value of this variable, results indicate the meaningless level of these coefficients at 5 percent error level. These results indicate that the coefficient of unconditional conservatism has significant relationship with long-term return on shares in the IPO Company. As a result, the null hypothesis is confirmed. Figure (3): Results of combination regression Statistic Type of Variable Coefficient SD PROB Z Relationship Positive and Constant statistically factor 5.575629 2.533424 2.200828 .0277 significant - CONS_UC Meaningless -0.257231 0.355438 0.723701 .4692 - AUDORG Meaningless -0.255283 0.240767 1.060287 .2890 Negative and SIZE - statistically -0.210500 0.093178 2.259134 .0239 significant UNDERPRICIN Meaningless G 0.020818 0.292454 0.071184 .9433 Positive and OFFERPRICE statistically 3.41E-05 1.45E-05 2.345129 .0190 significant - BM Meaningless -0.109251 0.511038 0.213783 .8307 AGE 0.016583 0.009141 1.814040 .0697 Meaningless - LEV Meaningless -0.041189 0.529631 0.077770 .9380 Negative and ROA - statistically -1.662814 0.859761 1.934041 .0531 significant - ABSCFO Meaningless -3.26E-07 2.49E-07 1.308751 .1906

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The The SD Obswit Obswit coefficient of Statistics probabilit dependen h Dep= h Dep = determinatio LR y statistic t var 0 1 n McFadden LR Statistics 0.103 0.5 58.188 0.000 195 210

According to the results of the above model test and as can be seen in Figure 3 you can see that the P-Value of the statistic LR, indicating a statistically significant of total regression which is equal to 0.000 and showed that the model at 99 percent is meaningful. The determination coefficient of fabricated R 2 dummy (McFadden) is equal to 0.103.

Results In this study, financial information of 81 non-financial IPO companies that are listed in Tehran Stock Exchange from 2002 to 2008 has been studied. The aim of this study was to investigate the relationship between conditional and non-conditional conservatism of IPO companies in years of initial public offering and a reduction in long-term stock returns, respectively. The logit regression model has been used in this study to test hypotheses. The results showed no significant relationship between conditional and unconditional conservatism in the initial public offering of shares and the return the long-term changes in IPO companies. This finding means conducting conservatism (both conditional and unconditional kind) in accounting operations in initial public offering in the IPO companies with long-term changes in stock returns has negative relationship, but this correlation was not significant and cannot be concluded that conservatives reduced stock returns in the long term.

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Special Issue INTERNATIONAL JOURNAL OF HUMANITIES AND January 2016 CULTURAL STUDIES ISSN 2356-5926

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1 Lee, Jimmy 2 Cho & lee 3 Sirada & kriengkrai 4 Chen & su 5 Heydary 6 Ruch & Taylor 7 UnyongPyo et al 8 Lara et al 9 Lee 10 Manuel 11 Chi et al 12 12 Schindele & Perotti

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