Investigating the Relationship between Disclosure Quality and Stock Return of the Companies Listed in Tehran Stock Exchange: Using a Simultaneous Equations System

Journal of Accounting Advances (J.A.A)
Vol. 7, No. 2, 2015, Ser. 69/3
 
 
Extended Abstract
 
Investigating the Relationship between Disclosure Quality and Stock Return of the Companies Listed in Tehran Stock Exchange: Using a Simultaneous Equations System
 
Dr. Amin Nazemi*           Alireza Momtazian**           Sajad Behpur***
 
Introduction
Decision making requires information and managers are always confronted with the problem of which information investors need for decision making. Every decision maker has a framework for his decision making based on his own mental structure; he encounters issues regarding his decision making framework as Stamp reports that one of the major difficulties in accounting standards development is lack of knowledge of decision making nature and logical process which decision maker attempts to access. The firm’s rate of return on investment is one of the main decision making criteria for investors and rate of return on investment calculation as a criterion for firm performance evaluation is obtained from information disclosed by the firm management.
Cases of studies on information disclosure is summarized in the following pat; so it is concluded which information should be reflected in financial reports and how people process information for achieving their prediction and decision making regarding future uncertain events. Sing-Vey and Desay (1971) performed a research titled as ‘experimental quality analysis of financial disclosure by firms’ in USA. They argue that information disclosure by the firms may be in various forms and annual report to stockholders is an important form of periodical disclosure. They found that:

Disclosure quality is better in large firms compared to smaller ones.
Disclosure quality is better in the firms with higher number of stockholders.
Disclosure quality is better in the firms audited by CPA institutes compared to the firms audited by small institutes.

In the studies, there is a duality relationship between disclosure quality and stock return. While some studies have examined the effects of disclosure quality on stock return, other studies have examined the effects of stock return on disclosure quality. Reviewing the evidence of the validity of both approaches mentioned above, can mean that there is a bilateral (two-sided) relationship between these two variables. Accordingly the above question is raised: “Is there a bilateral relationship between disclosure quality and stock return?”  In this regard, the goal of the present research is to study the bilateral relationship between disclosure quality and stock return in 127 listed companies of Tehran Stock Exchange (TSE) during 2003 to 2011.
 
Research Hypotheses
Based on the theoretical literature and the conducted studies, research hypotheses were developed as follows.
First main hypothesis: There is a bilateral Significant relationship between disclosure quality and stock return
 
Methods
The research methodology is a quantitative research that uses the scientific method and empirical evidence, and based on hypotheses and research designs has been set. This category of research is used when that criteria for measurement data quantitative and statistical techniques are used to derive the results. In this research, data of 127 companies are analyzed for the period of 2003-2011. At first, the bilateral relationship between the two variables was confirmed with granger causality test; then simultaneous equations system was estimated using two-step regression. The related data was collected through observation of Iranian database of Tehran Stock Exchange (Tadbir Pardaz) annual data files and the accompanying notes as found on www.rdis.com. For statistical analysis and to test hypotheses, descriptive statistics (i.e., mean, maximum, minimum and standard deviation) and inferential are used. The collected data was calculated using the Excel software and was analyzed using Eviews-7.
 
Results
The results of this research show that at a confidence level of 95%, there is bilateral relationship between disclosure quality and stock return of listed companies of TSE. In other words, the results of the simultaneous equation system have more reliability and validity than single-equation.
 
Discussion and Conclusion
Financial information forms the evaluation basis in capital market. Financial statements contain very important information that shareholders use in making decisions related to investments in stocks.  Appropriate disclosure in financial statements will be helpful in the decision extent that provides the possibility of predicting earnings trends, continuing profitability, management performance and so on.
While some studies have examined the effects of disclosure quality on stock return, other studies have examined the effects of stock return on disclosure quality. The goal of present research was to study the bilateral relationship between disclosure quality and stock return in listed companies of TSE.
It is recommended to encourage the companies having high-quality disclosures and charge the companies that have low-quality information disclosure given the importance of the quality of information disclosure on the exchange market. Thus, the regulators can affect the quality information disclosure (such as resource allocation in the economy and efficiency of information). Also, according to the bilateral relationship between stock returns and disclosure quality, we suggest considering these findings’ order to disclosure levels. 


* Assistant Professor of Accounting, Shiraz University
    corresponding author:  aminnazemi@gmail.com


** PhD. Student of Accounting, Shiraz University


***  PhD. Student of Economic, Shiraz University