Jurnal UMP Social Sciences and Technology Management
Vol. 3, Issue. 1,2015
Relationship between Quality of Financial Reporting with
the Gap between Suggested Price for Buy and Sale and
Transactions Volume
Nasrin Shanazari,
Department of Accounting, College of Sanandaj, Islamic Azad University, Sanandaj Branch, Sanandaj, Iran
Mohamad Omid Akhgar*
1Assistant Professor in Accounting, University of Kurdistan, Sanandaj, Iran
*Corresponding Author: Assoc. Prof .Dr. Mohamad Omid Akhgar
Abstract
This current study has been done with the purpose of investigation Relationship between
Quality of Financial Reporting with the Gap between Suggested Price for Buy and Sale and
Transaction Volumes. In this research, with consideration of limitations for companies under
research, 102 organizations that had accessible audited financial statements during the years
2009 to the end of 2013 were selected as statistical sample. This research was applied in
purpose and the method of data collection was descriptive and correlational.The results of
the research show that in regular situations, meaningful and inverse correlation exists
between quality of financial reporting and the gap between suggested price of buy and sale
and meaningful and direct correlation exists with transaction volumes. In other words, the
higher the quality of financial reporting is, the more the difference between suggested buy
and sale prices decreases and the reverse and high quality of reporting leads to increased
volume of transactions.
Keywords: Suggested Buy and Sale Prices, Quality of Financial Reporting, Volume of
Transactions
Introduction
The goals of financial reporting arise from the information needs and wishes of out of
organization users. The main purpose is expression of economic effects of events and
financial activities on the condition and performance of the business unit for helping outside
individuals with making financial decisions in relation with the trade unit (Wolk et al, 2001).
Based on the view point of the committee of accounting standards formulation, “financial
reporting not only includes financial statements, but is also inclusive of tools of information
transmission methods and these tools are directly or indirectly correlated with information
that is presented by accounting, namely information about company resources, assets, debts,
profit and etc” (Committee of Financial Accounting Standards, 1987).
This information should be such that investors, providers of financial facilities and other
use groups are helped in identification of the financial strengths and weaknesses of the
commercial unit and provide a basis upon which information regarding the performance of
the commercial unit can be evaluated during a financial period. In addition, the mentioned
information can show the possible effect of some resources on cash flow and amounts of cash
needed for observing the commitments of the commercial unit (Committee of Accounting
Standards Formulation, 2006).
Noravesh and colleagues (1998) have defined quality of financial reporting observance of
principles that differentiates useful information and improves the usefulness of financial
knowledge. The quality of information and clarity of reporting are among expectations in
the capital market. What is obvious and agreed upon is that both policy makers and
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investors request financial reporting with high quality, because the belief widely exists that
quality of financial reporting influences capital markets directly.
The efficiency of the capital market depends on the quality and understanding of
information such that the better this quality and understanding is, the more is the efficiency
of the capital market and the possibility of manipulating the price of stock is also obliterated.
Now, if among investors active in the capital market individuals exist who are in a better
position information wise compared to others for example regarding announcements about
profit, they will be able to affect market supply and demand and idiomatically lead to a gap
in prices (Ghaemi & Vatanparast, 2005).
Some users of information including individuals inside the organization such as
managers and analysts have access to secret news. The more the secret news is, the higher
the domain of difference between the suggested prices of stock buy and sale among investors
will become. As a result, the return for investors who lack access to this information
decreases (Lafond and Watts, 2008).
Economic theory predicts that with constancy of other conditions, increased quality of
financial reporting decreases information asymmetry. On the other hand, decreased lack of
information asymmetry leads to decreased differences between suggested buy and sale prices
and increased volume of transactions. Therefore, it is predicted that quality of financial
reporting will decrease suggested buy and sale prices and increased volume of transactions
(Auntie Mckennin, 2013).
Research Objectives:
1- Identification Relationship between Quality of Financial Reporting with the Gap
between Suggested Price for Buy and Sale.
2- Investigation Relationship between Quality of Financial Reporting and Transactions
Volume
Research Background
Bidel and Hilari (2006) using the symbol for quality of accruals based on the model of
Francis and colleagues showed how accounting information quality is related to investment
at the level of enterprises. Results of the research showed that high quality of accounting
increases investment efficiency by way of decreasing knowledge asymmetry between
managers and loan distributors and out of organization providers and also decreases
sensitivity of investment at the organization level to changes in cash flows.Louis and Vichia
(2000) in a research in the country of Germany for companies listed in the stock exchange
reached the conclusion that companies with high quality financial reporting and according to
international reporting standards present less asymmetric information and have high stock
exchange markets. These researchers note that high quality financial reporting has inverse
correlation with capital expenditure.Bidel and Hilari (2007) in a study showed that higher
quality of accounting information decreases knowledge asymmetry between aware and
unaware individuals and increases investment efficiency in capital items by way of
obliteration of deficiencies resulting from incorrect selection and moral risk. They reached
the conclusion that companies with high quality accounting information have better capital
return and increased yield from their investments. The latter (the higher quality of
accounting information) also on the average increases profits from investment in capital
assets.Akins and colleagues (2012) in their studies showed that in conditions of defective
competition, information asymmetry between traders leads to decrease in the price of stock
compared to complete competition. Information asymmetry leads to supply of cash flow and
the latter affects capital expenditure. Therefore, a positive correlation exists between
informed/uniformed traders and capital expenditure.Bahatacharia and colleagues (2008) in a
research evaluated the relationship between quality of profit and information asymmetry in
stock companies in New York. They found out that with decreases in quality of profiting,
information asymmetry increases. Information asymmetry leads to decreased risk of
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incorrect selection for providers of cash flow and the latter can lead to decrease in
announcement of prices and as a result decrease in cash flow. On another hand, they found
out that companies with weak profit quality, at the time of profit announcement, experience
a higher information asymmetry.
Ahmadpour and Rasaian (2006) evaluated the relationship between risking criteria and
gap between suggested buy and sale price of stock in Tehran’s stock exchange. The results of
the research showed that a model including 14 independent variables measures 68% of the
changes in the difference between stock buy and sale suggested prices.
Akhgar and Karami (2014) in a research evaluated the effect of organization
characteristics on the quality of financial reporting in companies accepted in the Tehran
stock exchange using 120 active companies during the time period between 2003-2012. In this
research, the effect of seven factors of company characteristics were evaluated in the
framework of three structures structural (company size and pyramid), supervisory
(constituents of the board of directors and institutional equity holders) and performance
related (profitability, cash flow and company growth) the results of which showed that
pyramid variables and the constituents of the board of directors has negative and meaningful
correlation with the quality of financial reporting and the variable of institutional equity
holders has no meaningful correlation with the research dependent variable.
Research Conceptual Model
Quality of Financial
Reporting
Volume of Transactions
Difference of Buy and Sale
Suggested Prices
Research Methodology
This research regarding to correlation and methodology was quasi-experimental and
retrospective and was in the domain of verification accounting research which is performed
with real and historical information. Quality wise and based on goals, this research was
applied. Data analysis was performed using multivariate regression model.
Methodology and Tools of Data Collection
Research Statistical Population
Statistical population included all companies accepted in the Tehran stock exchange
from the beginning of 2009 to the end of 2013. Sampling was by omission. In other words,
the companies needed to have the following inclusion criteria:
1. They should not be among banks, financial institutes and investment companies,
financial mediators, holding and leasing companies.
2. Their financial period should end at the last day of the year.
3. The companies should be stock market members during the research period and their
transaction stand still each year should not be more than three months.
4. Their financial statement should have been audited.
5. Information regarding their suggested buy and sale prices should be available.
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Eventually, after observance of the above criteria, the number of present companies in
the stock exchange up until the end of 2013 reached 102. The final sample volume included
510 observations (year-company).
Research Hypotheses:
1- There is significant relationship between Quality of Financial Reporting and Suggested
Price for Buy and Sale.
2- There is significant relationship between Relationship between Quality of Financial
Reporting and Transactions Volume
Research Variables:
Dependent variables: Difference between buy and sale suggested prices (price gaps)
and transactions volume.
Independent variable: Quality of financial reporting.
Explanation of the variables:
1-Difference between the suggested buy and sale prices
The formula for the above statement is defined as below:
Where:
: Best sale price,
: Best buy price.
2-Volume of transactions
The formula for measuring volume of transactions is as below:
In which:
: Number of stock transacted in a day
: Number of stock circulated.
-Independent variable is Quality of financial reporting.
To evaluate the quality of financial reporting the Kaznik (1999) quality of accrual model
has been used.
: Equivalent to total accruals
: Equivalent to change in income from sale in year t relative to the previous year
: Equivalent to change in net accounts receivable in year t relative to the previous
year
: Equivalent to final price of assets, machinery and equipment
: Equivalent to change in cash flow resulting in year t relative to the previous year
Data Descriptive Statistics
Symbols for descriptive statistics relevant to each of the variables in this research will be
explained.
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Variables
Mean
Standard
deviation
Minimum
Maximum
Coefficient
of Skewers
Coefficient of
Kurtosis
Table 1: descriptive statistics for research variables
Statistical Indices
Price Gaps
3.82
4.55
0.336
41.28
4.09
22.98
Volume of Transactions
0.151
0.207
0.0003
1.85
3.66
19.59
Quality of Financial Reporting
553913
1646048
257.24
16879188
6.32
47.9
Distribution domain of differences of the mentioned variables from data means
considering the standard deviation statistics covers from zero to 4.55 and as a result,
significant difference with this regard is not observed among the research units. Considering
the positive value for coefficient of skewness, it can be noted that the distribution of the
mentioned variable is skewed towards the right and the relationship (Mean>Median>Mode)
holds.
Testing of Hypotheses
First Hypothesis
There is significant relationship between Quality of Financial Reporting and Suggested
Price for Buy and Sale.
Table 6- Results of cumulative regression at a 5% significant level
Significant level
T statistics
0.00
Determination
coefficient
- 4.45
0.5122
Standard
deviation
1.21
DurbinWatson
statistics
B1 estimation
- 0.49
1.79
In this regression, Acc is variable of Quality of Financial Reporting and S is variable
of Price Gaps.
The negative value of shows that quality of financial reporting of companies
Leads to decrease in the difference between buy and sale suggested prices in the stock
market. Also, the determination coefficient shows that in the cumulative regression, 51% of
the change in price gaps is explained by the variable of financial reporting. Since the DurbinWatson statistics value is between the numbers 1.5 and 2.5 (1.79), the independence of the
remainders of the model is confirmed and the result is that the correlation between quality of
financial reporting and price gaps of companies accepted in Tehran’s stock exchange is
accepted. This correlation shows that the higher the level of financial reporting quality will
be equal the less level of the price gaps.
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Relationship between Quality of Financial Reporting with …
Second Hypothesis
2- There is significant relationship between Relationship between Quality of Financial
Reporting and Transactions Volume.
Table 7- Results of cumulative regression at a 5% significant level
Significant level
T statistics
0.00
Determination
coefficient
3.12
0.401
Standard
deviation
1.01
DurbinWatson
statistics
B1 estimation
0.43
2.11
In this regression, Acc is variable of Quality of Financial Reporting and V is variable
of Transaction Volume.
The positive value for
shows that quality of financial reporting of company leads to
increase in the volume of transactions in the stock market .The determination coefficient
also shows that in cumulative regression, 40% of the variable of volume of transactions is
explained by the variable of quality of reporting. Since the Durbin-Watson statistics is
between 1.5 and 2.5 (2.11), independence of the remainder of the model is also confirmed.
The result is that the correlation between quality of financial reporting and volume of
transactions of companies accepted in Tehran’s stock exchange is accepted.
This correlation shows that the higher the level of financial reporting quality will be
equal with the less level of transactions volume.
Conclusion
The correlation between reporting and price gaps has been evaluated. Considering the
results obtained, it can be concluded with 95% confidence that correlation exists between
reporting and difference between the suggested buy and sale prices of the companies
accepted in the Tehran stock exchange during the years 2009-2013. The negative value for
the coefficient of financial reporting quality (B 1) in Table 6 is expected and agrees with
theoretic foundations stating that presentation of quality financial reporting leads to
increased information for investors and other users and shows that quality of financial
reporting decreases the price gap in the stock market.
Additionally, with consideration of the results obtained, it can be concluded that with a
confidence level of 95% correlation exists between quality of reporting and volume of
transactions for companies accepted in the Tehran stock exchange during the years 2009 to
2013. The positive value for the coefficient of quality of financial reporting (B 1) in Table 7 is
according to expectation and agrees with theoretic foundations stating that provision of
quality financial reports increases investor and other user information and ultimately leads to
increased volume of transactions.
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