Special Issue INTERNATIONAL JOURNAL OF HUMANITIES AND January 2016 CULTURAL STUDIES ISSN 2356-5926 Investigating the Effect of Conservatism at the Time of Initial Public Offering on Long-Term Stock Returns of Companies Listed on the Tehran Stock Exchange 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 company 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 initial public offering 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. http://www.ijhcs.com/index.php/ijhcs/index Page 1923 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. Investors are always looking for good opportunities to obtain short- term returns, which is why the early days of the issuance of stocks 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 capital market, 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 business units. Chen and Su 4 (2013) investigated the indirect property investments in investee companies on the cost of debt and http://www.ijhcs.com/index.php/ijhcs/index Page 1924 Special Issue INTERNATIONAL JOURNAL OF HUMANITIES AND January 2016 CULTURAL STUDIES ISSN 2356-5926 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 shareholders 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 corporate governance 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 share 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 debts 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 cost of capital 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 http://www.ijhcs.com/index.php/ijhcs/index Page 1925 Special Issue INTERNATIONAL JOURNAL OF HUMANITIES AND January 2016 CULTURAL STUDIES ISSN 2356-5926 in information asymmetry, stock return volatility, 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