The Mediating Role of Financial Reporting Quality on the Relationship between Financial Statement Comparability and Cash Holdings

Document Type : Research Paper

Authors

1 Assistant Prof., Department of Accounting, Faculty of Management and Accounting, Farabi Campus, University of Tehran, Qom, Iran.

2 Msc., Department of Accounting, Faculty of Management and Accounting, Farabi Campus, University of Tehran, Qom, Iran.

Abstract

Objective: The purpose of this study is to examine the relationship between financial statement comparability on cash holdings and the mediating role of financial reporting quality in firms listed on the Tehran Stock Exchange (TSE).
Methods: Using data from TSE-listed firms from 2011 to 2017, this study employs multiple regression models and Sobel test to testing the research hypotheses.
Results: The results show that financial statement comparability significantly reduces corporate cash holdings. The results also suggest that financial reporting quality (disclosure quality and discretionary accrual) does not have a significant mediating effect on the relationship between comparability and cash holdings. These findings are robust to alternative measures of comparability and cash holdings. Also, additional test shows that trade credit has no mediating role in relationship between financial statement comparability and cash holdings.
Conclusion: The results show that investors and creditors rely on financial statements in their economic decision making, thus it is appropriate for regulators, supervisor institutions, and corporate governance bodies to place particular importance on the comparability of financial information. According to the Iranian capital market context and high inflationary economy, firms with high financial statement comparability have easy access to bank loans with low cost. Thus, firms with high financial statements comparability hold low cash. Also, the Iranian capital market context has different context, because of low agency problem and information asymmetry and financial reporting quality has not significant effect on information asymmetry. Thus, financial reporting quality has not mediating role on the relationship between comparability and cash holdings.

Keywords

References

Aflatooni, A. (2015). Investigating the Effect of Firms’ Bankruptcy Risk and Stock Returns’ Systematic and Idiosyncratic Volatilities on Cash Holding. Journal of Accounting and Auditing Review, 22(1), 21-40. (in Persian)
Aflatooni, A., khazaei, M. (2016). Investigating the Effect of Accruals Quality and Disclosure Quality on Labor Investment Inefficiency. Accounting and Auditing Review, 23(3), 269-288. (in Persian)
Aflatooni, A., Nemati, M. (2018). The Role of Financial Reporting Quality and Disclosure Quality in Increasing Commercial Credit. Accounting and Auditing Review, 25(1), 1-20. (in Persian)
Bahri Sales, J., Pakmaram, A., Ghaderi, G. (2018). The relationship between Product Market Competition and Earnings Management: Evidence from Discretionary Accruals. Management Accounting, 11(38), 15-26. (in Persian)
Baron, R. M., & Kenny, D. A. (1986). The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of personality and social psychology, 51(6), 1173-1182.
Bhattacharya, N., Desai, H., & Venkataraman, K. (2013). Does earnings quality affect information asymmetry? Evidence from trading costs. Contemporary Accounting Research, 30(2), 482-516.
Bushman, R. M., & Smith, A. J. (2001). Financial accounting information and corporate governance. Journal of accounting and Economics, 32(1), 237-333.
Chen, C. W., Collins, D. W., Kravet, T. D., & Mergenthaler, R. D. (2018). Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), 164-202.
Chen, Y., Dou, P. Y., Rhee, S. G., Truong, C., & Veeraraghavan, M. (2015). National culture and corporate cash holdings around the world. Journal of Banking & Finance, 50, 1-18.
Chung, R., Firth, M., & Kim, J. B. (2002). Institutional monitoring and opportunistic earnings management. Journal of corporate finance, 8(1), 29-48.
De Franco, G., Kothari, S. P., & Verdi, R. S. (2011). The benefits of financial statement comparability. Journal of Accounting Research, 49(4), 895-931.
Fang, X., Li, Y., Xin, B., & Zhang, W. (2016). Financial statement comparability and debt contracting: Evidence from the syndicated loan market. Accounting Horizons, 30(2), 277-303.
Ferreira, M. A., & Vilela, A. S. (2004). Why do firms hold cash? Evidence from EMU countries. European Financial Management, 10(2), 295-319.
Financial Accounting Standards Board (FASB) (1980). Qualitative Characteristics of Accounting Information. Statement of Financial Accounting Concepts No. 2. Norwalk, CT: FASB. Available at http://www.fasb.org/pdf/con2.pdf.
Financial Accounting Standards Board (FASB). (2010). Statement of financial accounting concepts no. 8: conceptual framework for financial reporting. Available at https://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176171111398PreCodSectionPagecid=1176156317989 >.
Foroghi, D., Ghasemzad, P. (2016). The Effect of Financial Statements Comparability on Stock Price Synchronicity. Journal of Financial Accounting Research, 8(1), 39-54.(in Persian)
Francis, J. R., Pinnuck, M. L., & Watanabe, O. (2013). Auditor style and financial statement comparability. The Accounting Review, 89(2), 605-633.
Francis, J., Nanda, D., & Olsson, P. (2008). Voluntary disclosure, earnings quality, and cost of capital. Journal of accounting research, 46(1), 53-99.
Francis, J., Olsson, P., & Schipper, K. (2008). Earnings quality. Foundations and Trends (R) in Accounting, 1(4), 259-340.
García‐Teruel, P. J., Martínez‐Solano, P., & Sánchez‐Ballesta, J. P. (2009). Accruals quality and corporate cash holdings. Accounting & Finance, 49(1), 95-115.
Habib, A., Hasan, M. M., & Al-Hadi, A. (2017). Financial statement comparability and corporate cash holdings. Journal of Contemporary Accounting & Economics, 13(3), 304-321.
Hajian, N., Anvary Rostamy, A., Rahmani, A., Azar, A. (2015). Investigating Effective Factors on Disclosure Scores of Listed Companies in Tehran Stock Exchange. Journal of Financial Accounting Research, 7(1), 71-92. (in Persian)
Hajiha, Z., & Chenari, Hassan. (2017). Financial statement comparability and real earnings management. Financial Accounting Research, 3 (9), 33-48. (in Persian)
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.
Khanmohammadi, H., Moradi, M., Khodaie, M. (2018). Investigating the Relationship between the of Financial Statements Comparability and Cash holdings in Companies Listed in Tehran Stock Exchange. Research in Accounting and Economics, 2 (4), 11-28. 
(in Persian)
Kia, A., & Safari, G. M. (2017). Financial Statements Comparability, Accrual-based Earnings Management, Real Earnings Management؛ An empirical test of Tehran Stock Exchange. Journal of Financial Accounting Knowledge, 4(2), 115-137.(in Persian)
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of accounting and economics, 39(1), 163-197.
Mehrvarz, F., Marfou, M. (2016). The Relationship between Financial Statements Comparability with Stock Price in Formativeness about Future Earnings. Empirical Studies in Financial Accounting, 13(49), 83-110.(in Persian)
Mirshekary, S., & Saudagaran, S.M. (2005). Perceptions and characteristics of financial statement users in developing countries: Evidence from Iran. Journal of International Accounting, Auditing and Taxation, 14(1), 33-54.
Moayedi, V., & Aminfard, M. (2012). Iran’s post-war financial system. International Journal of Islamic Middle Eastern Financing and Management, 5, 264–281.
Mohammad Rezaei, F., Mohd-Saleh, N., Jaffar, R., & Hassan, M.S. (2016). The effects of audit market liberalisation and auditor type on audit opinions: the Iranian experience, International Journal of Auditing, 20(1), 87-100.
Mollazadeh, M., Larri Dasht Bayaz, M., Saei, M.J. (2016). Impact of CEO financial expertise on earnings management. Financial Accounting and Auditing Research, 8 (30), 37-60. 
(in Persian)
Opler, T., Pinkowitz, L., Stulz, R., & Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of financial economics, 52(1), 3-46.
Opler, T., Pinkowitz, L., Stulz, R., & Williamson, R. (2001). Corporate cash holdings. Journal of Applied Corporate Finance, 14(1), 55-67.
Sarlak, N., Faraji, O., Ezadpour, M., Joudaki Chegeni, Z. (2018). CEO Over-confidence and Corporate Cash Holdings: Emphasizing the Moderating Role of Audit Quality. Accounting and Auditing Review, 25(2), 199-214.(in Persian)
Setayesh, M., Kazemnejad, M. (2012). Effective Factors on Disclosure Quality of the Firms Listed in Tehran Stock Exchange. Journal of Accounting Advances, 4(1), 49-79. 
(in Persian)
Zhang, J. H. (2018). Accounting comparability, audit effort, and audit outcomes. Contemporary Accounting Research, 35(1), 245-276.
Accounting and Auditing Review
Volume 27, Issue 1
2020
Pages 132-153

Files

Share

How to cite

Statistics