Investigating the Relationship between Speed of Price Adjustment and Earnings Quality of Listed Companies in Tehran Stock Exchange (TSE)

 
Journal of Accounting Advances (J.A.A)
Vol. 6, No. 1, 2014, Ser. 66/3
 
 
Extended Abstract
 
Investigating the Relationship between Speed of Price
 Adjustment and Earnings Quality of Listed Companies
 in Tehran Stock Exchange (TSE)
 




Dr. Ahmad Khodamipour
Shahid Bahonar University of Kerman
 


Mohammad Omidi 
Islamic Azad University, Science and Research Branch of   Kerman
 




Vahid Mohammadrezakhani
Shahid Bahonar University of Kerman




 
Introduction
Earnings can be divided into two components: cash flow and discretional accrual. As earnings with more accrual components are easily manipulated than those with more cash flow, earnings with less discretionary accrual are regarded as having better earnings quality. The reaction of investors to trading information is directly reflected in price adjustments, which is an important aspect of market efficiency. The empirical results show that the asymmetric price adjustment does indeed exist, with the speed of price adjustment to good news being faster than that to bad news.
In this paper we examine whether the speed of price adjustment exhibits an asymmetric reaction to good and bad news, and further examine whether such an association will accelerate following the changes of earning quality using Tehran Stock Exchange (TSE) Corporation data.
 
Research hypotheses
To achieve the purpose of this study, five research hypotheses are chosen. These hypotheses are as follow:
1. There is a significant and positive relationship between Earnings Quality (Dechow & Dichev model) and the speed of price adjustment to good news changes.
2. There is a significant and positive relationship between Earnings Quality (Ball and Shivakumar model) and the speed of price adjustment to good news changes.
3. There is a significant and positive relationship between Earnings Quality (Dechow & Dichev model) and the speed of price adjustment to bad news changes.
4. There is a significant and positive relationship between Earnings Quality (Ball and Shivakumar model) and the speed of price adjustment to bad news changes.
5. The speed of price adjustment to bad news is faster than to good news.
 
Methods & Variables
Firms in the statistical population of this study are the companies accepted in Tehran Stock Exchange from 1385 to 1389; 68 companies are selected by applying systematic sampling to select the sample population.
In this study, we used multiple regression models to examine the first to fourth hypotheses. In order to test the fifth hypotheses, we examine whether or not the asymmetric price adjustment to news exists using the Wilcoxon signed-rank test.
In the present research, three kinds of variables were employed: Independent variables, dependent variables and control variables.
Independent variables of this research are changes in Earnings quality based on Dechow & Dichev model and Ball and Shivakumar model.
Dependent variables of this research are the changes in the speed of price adjustment to good news and the changes in the speed of price adjustment to bad news.
 The control variables of this study are as follows: Number of trades (NT), Market Capitalization (MV), Stock Return Volatility () and Stock Price (P), to be included into the regression analyses to ascertain robust results.
Results
The results of estimating the first and second hypotheses indicate that there is a positive relationship between Earnings Quality (Dechow & Dichev and Ball and Shivakumar models) and the speed of price adjustment to good news changes, but this relationship is not significant. The obtained results from estimating the third and fourth hypotheses shows that there is a positive relationship between Earnings Quality (Dechow & Dichev and Ball and Shivakumar models) and the speed of price adjustment to bad news changes, but this relationship isn’t significant.
The results of estimating the fifth hypothesis indicate that the speed of price adjustment to bad news isn’t faster than that to good news in the Tehran Stock Exchange (TSE). Also the result shows that there is a significant and positive relationship between firm size and the speed of price adjustment to bad and good news changes. There is a significant and positive relationship between Stock Return Volatility and the speed of price adjustment to good news changes, also there is a significant and negative relationship between Stock Return Volatility and the speed of price adjustment to bad news changes.
 
Discussion and Conclusion
According to the results, we find that the speed of price adjustment to bad news isn’t faster than to good news in the Tehran Stock Exchange (TSE). Further, the speed of price adjustment to news is not significantly affected by the Earning quality, and does not further accelerate with the changes of earning quality; however, the relationship between them is positive. The results show that earnings quality and its changes cannot lead to changes in reaction speed for investors; in other words, changes in earnings quality is not understood by the Iranian capital market investors.