The Impact of Conditional Accounting Conservatism on the Future Stock Price Crash Risk of Listed Companies in Tehran Stock Exchange

 
Journal of Accounting Advances (J.A.A)
Vol. 4, No. 2, 2012, Ser. 63/3
 
 
Extended Abstract
 
The Impact of Conditional Accounting Conservatism on the Future Stock Price Crash Risk of Listed Companies in Tehran
 Stock Exchange
 
Dr. D. Foroughi                        M. Mirzaei
University of Isfahan
 
Introduction
Being aware of the financial situation of the firm and being more familiar with investors and creditors, managers as those who are responsible for providing financial statement, try potentially to make a good picture of the firm’s conditions. Therefore, they tend to delay the disclosure of bad news and identify the good news as soon as possible. Manager’s tendency to hide bad news causes stock price crash risk and generally negative skewness of stock return. Conservatism as a governing mechanism, through enforcing the possibility of asymmetric confirm for recognizing earning and losses, results in the acceleration of identifying bad news versus good ones. Consequently, it prevents piling of bad news in the company and decreases possibility of sudden releasing of bad news in the market.
 
Research Questions or Hypothesis
The main purpose of the present study is to investigate the relationship between conditional conservatism in financial reporting and the future stock price crash risk. To do this, two main hypotheses and three subsidiary ones were specified. The hypotheses of this research are as follows:
H₁: conditional conservatism in financial reporting reduces the future stock price crash risk.
H₂: the impact of conditional conservatism on reducing future stock price crash risk is greater for firms with higher information asymmetry.
To test second main hypothesis, the following three subsidiary hypotheses were specified.
H_2a: the impact of conditional conservatism on reducing future stock price crash risk is greater for firms that operate in monopoly markets.
H_2b: the impact of conditional conservatism on reducing future stock price crash risk is greater for firms that have no institutional investors in their ownership structure.
H_2c: the impact of conditional conservatism on reducing future stock price crash risk is greater for firms that have lower than 50% outside directors on their board.
 
Methods
To test the hypotheses, a sample was selected among the listed companies in Tehran stock exchange (TSE) during 1380-1388(2001-2009). Also, to measure conservatism, the measure of conditional conservatism by Khan and Watts (2010) was used and the method of logistic regression and the model of pooled data were applied. To examine the significance of all resulting coefficients, t-test and z-test were used.
 
Results
The results of estimated models showed that, there is a negative relationship between conditional conservatism and future stock price crash risk. So, the first main hypothesis is not rejected in confidence level of 95%. The results also showed that when there is a sort of information asymmetry among managers and outside investors, the ability of conditional conservatism for decreasing future stock price crash risk is more. So, the subsidiary hypotheses and the second main hypothesis are not rejected in confidence level of 95%.
Discussion and conclusion
In this study, the relationship between conditional conservatism and future stock price crash risk of companies listed in TSE were investigated. Findings of this research showed that conditional conservatism in financial reporting; reduce future stock price crash risk. In other words, conservative accounting prevents the accumulation of bad news through enforcing managers to timely disclosure of such news. Hence, conservative accounting decreases the probability of sudden releasing of bad news in the market and consequently reduces future stock price crash risk.
Results also showed that, the ability of conditional conservatism to reduce future stock price crash risk is greater for firms with higher information asymmetry. Namely, those operating in monopoly markets, have no institutional investors in their ownership structure and have lower than 50% outside directors in their board. When there is information asymmetry, managers have incentives to delay the disclosure of bad news and accumulate them within the firm. Given that information asymmetry results in conservative accounting, one could expect that, for firms with higher information asymmetry, the ability of conditional conservatism to reduce future stock price crash risk is greater.
 
Keywords: Conditional Conservatism, Future Stock Price Crash Risk, Information Asymmetry, Good News, Bad News.