The impact of the breakdown of bad news indicators on conditional conservatism in accruals-based models

Document Type : Research Paper

Authors

1 Department of accounting, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran

2 Department of accounting, Faculty of Economics, Management and Social Sciences, Shiraz University, Shiraz, Iran

Abstract

Journal of Accounting Advances, (2020) 12(1): 29-61
DOI: 10.22099/JAA.2019.33243.1862
  Journal of Accounting Advances (JAA)
Journal homepage: www.jaa.shirazu.ac.ir/?lang=en
  The Impact of the Breakdown of Bad News Indicators On Conditional Conservatism in Accruals-Based Models
ABSTRACT
Received: 2019-4-19
Accepted: 2019-12-25
  One of the new issues in the field of conservatism is to examine the impact of bad news on conditional conservatism. Separating bad news indicators gives new insights on accruals and improves accrual models. The purpose of this study is to investigate the effect of separation of these indices on conditional conservatism in accrual-based models in comparison with the effect of general indices on these models. For this purpose, data of 144 companies were collected from Tehran Stock Exchange for a period of 11 years from 1385 to 1395,  and relationships between research variables using panel data and the generalized least squares method are analyzed. In this study, the results of Alan et al., (2013), Ball and Shivakumar (2006) and Byzalov and Basu (2016) models were compared. The results of the comparison showed that separating bad news indices improves accrual-based models to predict the relationship of these indices with conditional conservatism. Also, other findings of this study based on the results of Basilo and Basu model showed that sales decrease, decrease in number of employees and cash flows this year have a direct and significant relationship with conditional conservatism, while decrease of cash flows of the previous year and the next year did not have a significant relationship with conditional conservatism.
* Corresponding author:
  Dr. Mohsen Dastgir
Professor, Department of Accounting, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran.
 
E-mail: dastmw@yahoo.com
 
  1- Introduction
       One of the new issues in the field of conservatism is to examine the impact of bad news on conditional conservatism. Separating bad news indicators gives new insights into accruals and improves accrual models. The purpose of this study is to investigate the effect of separation of these indices on conditional conservatism in accrual-based models in comparison with the effect of general indices on these patterns.
  2- Research Hypothesis
       H1: The asymmetric effects of the news indicators individually, in comparison with the asymmetric effects resulting from the combination of news indicators in one go, lead to a better estimate of conservatism in the corporate accrual items.
       H2: The bad news about sales changes has a significant effect on the asymmetric timeliness of accruals.
       H3: The bad news about changes in the number of employees has a significant impact on the asymmetric timeliness of accruals.
       H4: The bad news of past cash flows has a significant effect on the asymmetric timeliness of accruals.
       H5: The bad news of current cash flows has a significant effect on the asymmetric timeliness of accruals.
       H6: The Bad news of upcoming cash flows has a significant impact on the asymmetric timeliness of accruals.
 
3- Methods
       In order to carry out this research, the required data were collected from 144 manufacturing companies from 2006 to 2016. Statistical data were analyzed using panel data and generalized least squares method.
  4- Results
       The first hypothesis is confirmed. This means that by separating bad news indicators, the explanatory power of the model is enhanced and the model is strengthened. The second hypothesis is confirmed. As a result, it can be stated that bad news about sales changes has a positive and significant effect on the time asymmetry of working capital accruals. The third hypothesis is confirmed. As a result, it can be stated that bad news about staff changes has a positive and significant effect on the time asymmetry of working capital accruals. The fourth hypothesis is not confirmed. As a result, it can be stated that the decrease in cash flow last year (bad news) does not have a significant effect on the time asymmetry of working capital accruals. The fifth hypothesis is confirmed. Consequently, it can be stated that the decrease in current cash flow (bad news) has a significant and inverse relationship with the time asymmetry of working capital accruals. The sixth hypothesis is not confirmed. Consequently, it can be stated that the decrease in future cash flows (bad news) does not have a significant effect on the time asymmetry of working capital accruals.
 
5- Discussion and Conclusion
       The results of the study showed that the disaggregated indicators of bad news have a stronger relationship with conditional conservatism. In fact, the results show that decentralized bad news models are more accurate and optimized than general news models. The second hypothesis is also supported because the decline in sales is an undesirable sign of the future situation, and the conservative principle requires that certain impairment losses be recognized. The results of the third hypothesis show that the decrease in the number of employees can indicate some skepticism about the future and lead to more conservatism in accruals. Likewise, the reasons for disproving the fourth and sixth assumptions may be due to factors such as the existence of earnings management in financial information, or the lack of conservatism in financial reporting by managers based on future estimates.
 
Keywords: Conditional Conservatism, Asymmetric Timeliness, Operational Cash Flow, Accruals, Bad News.
 
 
 
 

References

 Aghaei, MO., & Khalili, M. (1395). Sensitivity of returns to profit uncertainty changes. Accounting Advances, 8 (2), 41-64. (In Persian)
Ahmed, A. S. & Duellman, S. (2013). Managerial overconfidence and accounting conservatism. Journal of Accounting Research, 51(1),
1-30.
Allen, E. J., Larson, C. R. & Sloan, R. G. (2013). Accrual reversal, earnings and stock returns. Journal of Accounting and Economics, 56(1), 113–129.
Badiei, H., Mahmoudi, M. & Rezazadeh, R. (1393). The impact of contingent and unconditional conservatism on earnings quality using Basu, Ball & Shivakumar Model. Management Accounting & Auditing Knowledge, 3 (12), 23-31. (In Persian)
Ball, R. & Shivakumar, L. (2005). Earnings quality in UK private firms: Comparative loss recognition timeliness. Journal of Accounting and Economics, 39(1), 83–128.
Ball, R. & Shivakumar, L. (2006). The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 44(2), 207–242.
Ball, R., Kothari, S. P. & Nikolaev, V. V. (2013). Econometrics of the Basu asymmetric timeliness coefficient and accounting conservatism. Journal of Accounting Research, 51(5), 1071–1097.
Banker, R. D., Byzalov, D., Ciftci, M. & Mashruwala, R. (2014). The moderating effect of prior sales changes on asymmetric cost behavior. Journal of Management Accounting Research, 26(2), 221–242.
Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3–37.
Basu, S. & Liang, Y. (2019). Director‐liability‐reduction laws and conditional conservatism. Journal of Accounting Research, 57(4), 889-917.
Beaver, W. H. & Ryan, S. G. (2005). Conditional and unconditional conservatism: Concepts and modeling. Review of Accounting Studies, 10(2–3), 269–309.
Bushman, R. M., Smith, A. J. & Zhang, F. (2011b). Investment cash flow sensitivities really reflect related investment decisions. Working paper. Available at http://ssrn.com/abstract=842085.
Byzalov, D. and S. Basu (2016). Conditional conservatism and disaggregated bad news indicators in accrual models. Review of Accounting Studies 21(3): 859-897.
Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18, 3–42.
Dechow, P. M. & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(supplement), 35–59.
Dechow, P. M., Kothari, S. P. & Watts, R. L. (1998). The relation between earnings and cash flows. Journal of Accounting and Economics, 25, 133–168.
Dhaliwal, D., Huang, S., Khurana, I. K. & Pereira, R. (2014). Product market competition and conditional conservatism. Review of Accounting Studies, 19(4), 1309–1345.
Fairfield, P., Ramnath, S. & Yohn, T. L. (2009). Do industry-level analyses improve forecasts of financial performance? Journal of Accounting Research, 47(1), 147–178.
Garcia Lara, J. M., Garcia Osma, B. & Penalva, F. (2009). Accounting conservatism and corporate governance. Review of Accounting Studies, 14(1), 161–201.
Ghalibaf Asl, H., Nik Ravesh, M. & Dolat Kami, M. (2015). Conditional accounting conservatism and financial flexibility. Experimental Accounting Research, No. 16, 107-123. (In Persian)
Ha, J. & Feng, M. (2018). Conditional conservatism and labor investment efficiency. Journal of Contemporary Accounting & Economics, 14(2), 143-163.
Holthausen, R. W. & Watts, R. L. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics, 31, 3–75.
Javid, D., Dastgir, Mohsen. & Arab Salehi, M. (1394). Investigating the impact of internal control quality on conditional conservatism in companies listed in Tehran Stock Exchange. Financial Accounting, 7 (26), 121-151. (In Persian)
Jayaraman, S. & Shivakumar, L. (2013). Agency-based demand for conservatism: Evidence from state adoption of antitakeover laws. Review of Accounting Studies, 18(1), 95–134.
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228.
Khajavi, S., Wali Pour, H. & Askari, S. (1389). The effect of conservatism on the profitability of companies listed in Tehran Stock Exchange. Accounting and Auditing Research, No. 8, 90-103. (In Persian)
LaFond, R. & Roychowdhury, S. (2008). Managerial ownership and accounting conservatism. Journal of Accounting Research, 46(1), 101–135.
Mashayekh, S. & Nikbakht, Z. (1395). The impact of accounting conservatism on corporate financing volume. Accounting Research, 6 (1), 45-67. (In Persian)
Mehrani, S. & Samiie, F. (1397). The impact of conditional conservatism on human resource investment efficiency, Accounting Knowledge, 10 (2), 137-156. (In Persian)
Meshki Miawaghi, M., Kheradyar, S. & Hassanzadeh, N. (1397). Investigating the relationship between cost management strategy, market competition and real profit management in companies listed in Tehran Stock Exchange. Accounting Advances, 10 (1), 211-235. (In Persian)
Mojtahedzadeh, V. & Farshi, Zahra. (1391). Investigating the relationship between accounting protection and managers' investment decisions in companies listed in Tehran Stock Exchange. Accounting and Auditing Reviews, 19 (67), 91-104. (In Persian)
Mora, A., & Walker, M. (2015). The implications of research on accounting conservatism for accounting standard setting. Accounting and Business Research, 45(5), 620–650.
Nikolaev, V. V. (2010). Debt covenants and accounting conservatism. Journal of Accounting Research, 48(1), 51–89.
Qiang, X. (2007). The effects of contracting, litigation, regulation, and tax costs on conditional and unconditional conservatism: Cross-sectional evidence at the firm level. The Accounting Review, 82(3), 759–796.
Rouhi Maleki, S. & Pak Maram, Asgar. (1396). Investigating the relationship between accounting conservatism and market response and corporate value. Accounting Research, 7 (4), 99-126. (In Persian)
Roychowdhury, S. & Watts, R. L. (2007). Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting. Journal of Accounting and Economics, 44(1–2), 2–31.
Ruch, G. W. & Taylor, G. (2015). Accounting conservatism: A review of the literature. Journal of Accounting Literature, 34, 17–38
Sajjadi, S. H., Nikkar, J. & Hajizadeh, S. (1397). Investigating different aspects of the company's growth process in different periods of product diversification. Accounting Advances, 10 (1), 95-121. (In Persian)
Shahbazi, M. & Shahbazi, B. (1393). Investigating the relationship between debt ratio, size and cost of corporate capital with conditional and unconditional conservatism. Accounting Knowledge, 5 (16), 33–54. (In Persian)
Talaneh, A. & Kazemi, M. (1395). Conservatism and information content benefit. Accounting and Auditing Reviews, 23 (4), 435-460 (In Persian).
Tan, L. (2013). Creditor control rights, state of nature verification, and financial reporting conservatism. Journal of Accounting and Economics, 55(1), 1-22.
Vuong, Q. H. (1989). Likelihood ratio tests for model selection and non-nested hypotheses. Econometrica, 57(2), 307–333.
Watts, R. L. (2003a). Conservatism in accounting, part I: Explanations and implications. Accounting Horizons, 17(3), 207–221.
Watts, R. L. (2003b). Conservatism in accounting, part II: Evidence and 

Files

History

  • Receive Date: 22 April 2019
  • Revise Date: 25 December 2019
  • Accept Date: 25 December 2019

Share

How to cite

Statistics