Investigating the effect of management behavioral strains on the relationship between financial statements entropy and stock returns

Document Type : Research Paper

Authors

1 PhD graduate in accounting from Shahid Chamran University of Ahvaz

2 Member of the faculty of Persian Gulf University, Bushehr

3 faculty of busehr

Abstract

1- Introduction
The purpose of this research is to investigate the effect of managers' behavioral styles on the relationship between the entropy of financial statements and stock returns in companies listed on the Tehran Stock Exchange. The first step in measuring the performance of a business unit is to calculate the efficiency achieved according to the goals set in advance for that business unit. Since the increase of shareholders' wealth has been proposed as the main goal of business units, therefore, a business unit should act in such a way as to increase the shareholders' wealth by obtaining appropriate returns. Entropy is a measure of the amount of ambiguity or irregularity of information, in other words, entropy is a measure of uncertainty in a set of information. The large changes in the composition of financial statement items (financial statement entropy) indicate the lack of financial stability and stability as well as the existence of investment risk in business units. Among all the information provided by the accounting information system, the entropy of the financial statements can be one of the effective indicators for investment and economic decisions, and this concept can be considered as the intersection of accounting information and users' needs. In fact, the purpose of analyzing financial statements is, on the one hand, to evaluate the past performance of business units, and on the other hand, to provide appropriate information and methods for planning in order to achieve the future goals of business units.  On the other hand, company managers, by knowing the factors affecting investment and using them to reach the optimal investment level, can create maximum efficiency so that they do not lose profitable investment opportunities, and to satisfy the shareholders.  Undoubtedly, the issue of investment is one of the most important duties of company managers, and if the managers can correctly identify valuable investment opportunities in the market and invest appropriately in each of them, this will eventually lead to the growth of the company and the wealth of the shareholders will increase.  This will increase the value of the company. Narcissistic people show symptoms such as the influence of personal desires. Overconfidence is a person's hope for the future. According to the mentioned definitions, investigating the possibility of losing the company's financial resources and entering the helplessness stage due to the appearance of these behavioral strains and making wrong decisions far from reality is a very important issue.
 
 
2- Research questions or hypothesis
According to the theoretical and empirical background of the research, in many developed and developing countries, the impact of many variables on stock returns has been investigated; But so far, less attention has been paid to the effect of entropy of financial statements on stock returns; So the question is, what effect does the entropy of financial statements have on stock returns? And also, what is the effect of managers' behavioral characteristics on this relationship? These are important questions. The answers to these questions can provide reliable empirical evidence to investors to estimate the amount of risk as well as make better decisions in order to achieve the desired return.
First hypothesis: There is a significant relationship between general entropy and stock returns.
 Second hypothesis: Managers' narcissism has a significant effect on the relationship between general entropy and stock returns.
The third hypothesis: Managers' overconfidence has a significant effect on the relationship between general entropy and stock returns.
 
3- Methods
This research is applicable in terms of purpose, and it is a correlational descriptive research in terms of the relationship between variables, that was conducted using historical information. The real data of the companies have been analyzed as combined company-year data. This has been done using the generalized least squares regression model. The mentioned data has been extracted and collected from Dadeh Pardaze Novin software and Codal system. Also, Excel software was used for data preparation and Eviuse software was used for data analysis. The statistical population studied in this research consists of the companies listed in Tehran Stock Exchange during the years 1391-1400. The sample selection method in this research is the elimination method according to the predetermined criteria. According to the considered criteria, 94 companies were selected as the research samples.
 
4- Results
The first hypothesis of the research has investigated the effect of entropy of financial statements on stock returns. The results of the test of this hypothesis showed that the entropy of financial statements has a negative and significant effect on stock returns. The second and third hypotheses have investigated the effect of managers' behavioral styles on the relationship between the entropy of financial statements and stock returns. The results of the tests of these two hypotheses showed that managers' behavioral traits (managers' narcissism and overconfidence) cause the negative relationship between the entropy of financial statements and stock returns to intensify.
 
5- Discussion and Conclusion
The entropy of financial statements increases the information risk and, as a result, deprives investors and creditors of their confidence in their decisions to invest or grant credit, and leads to a decrease in stock returns. On the other hand, the tendency of narcissistic and overconfident managers to biased financial reporting reduces the quality and credibility of financial statements as one of the most important sources of information for users of financial statements, and leads to the intensification of the negative relationship between the entropy of financial statements and stock returns. The findings of this research can cover the existing research gap in this field and be useful for investors, creditors, board members of business units and capital market legislators in decision-making.
 
 
 

Keywords

References

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  • Receive Date: 18 March 2023
  • Revise Date: 10 September 2023
  • Accept Date: 11 September 2023

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