Int. j. econ. manag. soc. sci., Vol(3), No (12), December, 2014. pp.

33-38

TI Journals

International Journal of Economy, Management and Social Sciences

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ISSN:
2306-7276

Copyright 2014. All rights reserved for TI Journals.

Studying the Relation between Informational Asymmetry and

Conservatism during Inaction Stage in Accepted Companies in
Tehran Stock Exchange
Mahdi Saghafi *
Faculty member, Department of Accounting, Payame Noor University, PO BOX 19395-3697 Tehran, Iran.

Azam Pouryousof
Faculty member, Department of Accounting, Payame Noor University, PO BOX 19395-3697 Tehran, Iran.
*Corresponding author: m.s_accountant@yahoo.com

Keywords

Abstract

Conservatism
Informational asymmetry
Life cycle

The present study aims to study the relation between informational asymmetry and conservatism during the
inaction stage in accepted companies in Tehran Stock Exchange. So all the companies accepted in Tehran
Stock Exchange have been selected as the statistical society. The researcher has selected 110 companies as
the sample volume. For collecting data, RahaavardeNovinsd, from the stock exchange site, has been used.
For testing the research theory, the data normality was measured by Smirnove test, and then it was tested by
the research theory regression. The test result showed that there is no relation between informational
asymmetry and conservatism during wane stage. The research results show that the conservatism variable in
the accepted companies in Stock Exchange is not a good criterion for measuring the informational
asymmetry.

Introduction
On the basis of theoretical concepts, such financial information reporting is effective that has qualitative features. Basic qualitative features are
related to the information content, their relatedness and reliance.Caution or conservatism is one of the basic features of reliance. In theoretical
concepts of financial reporting, the caution has been defined as bellow:
Caution is the use of some degree of attention that is necessary for judging the measurement in ambiguity condition such that the incomes or
properties are not presented more than reality or the expenditure or debts are not offered less than reality. By thorough notice on the company
financial condition, and having more awareness than the financial-statements users, the managers as the responsible of financial-statement
provider try to present the unit commercial image proper. For example by considering cycle expenditure as properties, make the cost decrease
and profit increase. Total result of these operations is better presentation of the commercial unit than its real condition that ultimately leads to
increase of investment motivation through external factors.In these conditions, accounting principles and procedures, by relying on codifier
authorities of accounting standards, use the concept of conservatism for balancing the optimism of those managers who supportthe beneficiaries'
rights and present the financial statements fairly. One of the applied models in relation to the organization conditionis determining the
organization life cycle. According to this model, each organization, product, industry or trade has a life cycle. That is during a time periodit born,
grows, and matures and then its saturation and decadence and old age arrive. So having recognizedeach organization place, we should program
such that the organizations always stay in their growing and mature period. In this paper the relation between informational asymmetry and
conservatism during inaction stage has been studied.

Background
Jacobson and Aker (1993) have compared the informational asymmetry between the investment market in Japan and USA. Their results showed
that Japan investment market reflects the information related to the future profitability of stock price sooner than USA stock market, because
through the company's ownership structure, Japanese stockholders, in comparison to Americans, are more aware of the company's future
perspective.
Anti Fredriksson in 2006 confirmed the conservative accounting on decrease of debt expenditures, and confirm this relationship, this result that
is when conservative accounting and reporting are used as criteria for strength of loaner- borrower power, debt expenditures will decrease.
YuWang in 2006 studied the relation between informational asymmetry and the investors' behaviors around the time of profit
announcement.Theirresearch showed that if they decrease the announcementof the informational asymmetry profit, the representative of
informational asymmetry during the pre-announcement period will be less than post-announcement period;but no strong result got. Generally the
results showed that in a quarter of cases profit announcement will decrease informational asymmetry for the company, especially about bad
news; this is may be because of this fact that companies have no tendency to reveal the information about good or bad news before announcing
the profit.
Zho (2007) in a research studied the effect of life cycle on the relatedness degree of risk criteria by classifying the companies in the stages of
grow, mature and decadence. His findings show that the relatedness degree and increasing descriptive power of the risk criteria during different
stages of life cycle are meaningfully different from each other. Increasing descriptive power of the risk criteria during decadence stage has the
most amounts, and during mature stage the less amounts (Biksia, 2007, 165-175).
Dehdaar (2007) studied the effect of life cycle on increasing descriptive power of profit components and cash flows. His findings show that
during the stages of growing and mature, valuation patterns based oncommitment items and profit, in comparison to the patterns based on
operational cash flow, investment and financial providing, contain more increasing descriptive power, and during decadence stage the convers is
true.

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International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.

Karami and Omrani (2009) studied the effect of the company life cycle and conservatism on the company value. The results show that the
investors care more about net operational properties and unusual operational profit of the companies during the growing stage than to the
companies during the stages of mature and decadence. They also show that during the stages of growing and mature, the investors care more
about net operational properties and unusual operational profit of the conservative companies (than the companies use accounting procedures
impetuously) and during the decadence stage this is true.
Ghorbani (2006) studied the relation between the profit and cash flows and the company value in the framework of the company life cycle. His
findings show that during the growing and decadence stages, the relation between the cash flows and the company value is stronger than the
relation of profit and the company value, and during the mature stage the converse is true.

Informational asymmetry
Informational asymmetry is a condition in which one party has more information than the other. This occurs because of different factors such as
private transactions and information (Jalili, 2008, 45).
In this paper, informational asymmetry has been calculated qualitatively through the difference in proposed domain of stock selling-buying
price.

Conservativeness
The purposes of financial reporting and accounting basics imply that the information provided by the financial reporting have specified features.
These features in theoretical concepts of Iran financial reporting are specified as qualitative properties (the Board of Financial Accounting
Standards, 1980). Conservative accounting plays an important informational role. The informational role of the conservative accounting
increases the information accuracy and precision (Guy and Verrecchia, 2007; Kacksi et.al. 2009, 2-16).
Kiso et.al (2001) defines conservatism such: "traditionally, conservatism in accounting is a tool that selects a least-consequences solution when a
procedure is selected with this doubt that it may present the more properties and profit than reality". In the view of Beaver (1998) conservative
behaviors are such that lead to select less incomes (than to more incomes) and more expenditures (than less expenditures), and recognize
unrealized losses, while don't recognize non-realized profits.

Decadence or inaction
During this stage, if there is growing opportunities, it is almost surly trivial. Profitability and liquidity and commitment performing indexes has
been decreasing, and the company has been in a very sever competitive condition. Besides, the cost of financial providing from external
resources is high such that in most cases the investment output or balanced investment output is less than the financial providing rate (Adezes,
1989).
Growing opportunities during decadence stage typically is very trivial. The indexes of profitability, liquidity and commitment performing have
been decreasing, and the company has been surrounded in very severe competitive condition. Besides, the cost of financial providing from
external resources is so high that in most cases the internal output rate is less than financial providing rate; i.e. IRR<K (Adezes, 1989).

Emerging concept of informational asymmetry in investment market

In the literature relating to the market infrastructure, the proposed pricedomain of stock selling-buying composes of 3 parts: order processing
cost, supply preservation cost and adverse selection cost. The order processing cost is the amount that market-makersspend for preparing for
getting the selling and buying orders (Tinik, 1972).The part of supply preservation cost has been modeled by Stall (1978) and Hevo Stall (1981)
expresses that the transactions costs cause that the market-makers preserve various portfolio through it could cover their expenditures. Finally,
the adverse selection presented by Kapland and Galli (1983)and Golsten and Milgrom (1985) shows a compensation matter for dealersto accept
the risk of transacting with those who may have private and important information. On the other words, if non-aware individuals form a large
part of the market, the market-makers will increase the proposed price difference of stock selling-buying thereby compensate the risk of adverse
selection.

Informational asymmetry and proposed price domain of stock selling-buying

Recently experimental researches have paid attention to the effect of profit announcement on the behavior of proposed price domain of the stock
selling-buying generally. Oshman and Mors (1983) according to their studies of on 25 companies found the change of proposed price domain of
stock selling-buying after profit announcing. Vikintash and Chiang observed important changes in price domain of stock selling-buying after
profit announcing, only when no information from the company during 30 days before profit announcing is published.
Pattel (1991) claimed that after profit announcing, the proposed price domain of the stock selling-buying will increase. Lee and
McLoveredy(1993) ,using information, presented some observations on their basis the proposed price domain of the stock selling-buying in the
period of after profit announcing has more extent for one day, and before profit announcing the proposed price decreased.
Krinski and Lee (1996) found that profit announcing will increase informational asymmetry in the market. According to informational
asymmetry model presented by Kapland and Gall (1983) and Miloram and Golsten (1985) we can imagine two kinds of dealers in the market:
(a)
Traders cash
(b)
informed Traders
Aware dealers transact because they have private information have not been reflected in the prices, while liquidity dealers (non-aware) transact
only because of having liquidity. Of course these models point to the relations between the selling-buying price difference and aware individuals
in the market. Market-makers are at loss if they transact with aware individuals, and compensate this loss through extending the proposed price
domain of the stock selling-buying. On the basis of this model, informational asymmetry in the market results in increase of the proposed prices.
In Kimm and Verchiya model (1994) some aware individuals in the market such as major shareholders lead public information (such as profit
announcement) to private information. It is obvious that these individuals have superior informational than the others and so are able to evaluate
better the institute operation through profit announcing. Of course their basic focus is on how informational asymmetry affects the aware
individuals' exchanges when the profit is announced. In their view the profit announcement leads to the increase of the exchange volume and

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Studying the Relation between Informational Asymmetry and Conservatism during Inaction Stage in Accepted Companies in Tehran Stock Exchange
International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.

extension of informational asymmetry. Kimm and Verchiya express the effects of these announcements in to two forms: first, profit
announcements contrive a situation for equal deal in the market because lead to information publishes for all present people in the market. So we
will observe the increase of informational asymmetry during the days before profit announcement. Second, the market composed of individuals
who have different capabilities in information processing. According to this view, informational asymmetry should not increase before profit
announcement, rather should stay in an ascending level after profit announcement. Because some dealers are able to process the information
better, and this is the information process, not informational asymmetry, whichresults in transactsvolume increase in a less liquidity
environment. At this time non-aware dealers refuse transacting because of the proposed price domain increase of the stock selling-buying.

Criteria of the relation between the stock output and profit

The stock market prices show the changes of property value in the time of their occurrence, whether those changes include losses or gains of the
property value. Thus one can say that the stock outputs always are on time.According to conservatism prediction, the basis of recognizing
accountinglosses is more on-time than the gains. So one expect that accounting losses andthe stock outputs are mostly contemporaneous than
accounting gains (Watts, 2003, 93).Basu (1997) by using these basics introduces criteria by the name of "time asymmetry of profit" for
conservativeness. In next section we turn to it in detail.

The research hypothesis

There is a relation between informational asymmetry and conservativeness during the company decadence stage.

The research variables

Variable is those features observed and collected by the researcher. It is a quantitative that can be varying individually and observationally. In
present research the variables are classified in to two groups of dependent variable and independent variable according to their roles.
Independent variable is conservativeness and dependent variable is informational asymmetry.

The research method

Research method consists of rules, tools and valid (reliable) and organized ways for investigating the realities, finding unknowns, and getting the
solution of problems (Khaki, 2007, 201).
The present research in the view of classifying according to the minor purpose of applied researches and of the method is a correlation one. The
library methods are used in all scientific researches, but in some of researchesthese methods are used in some parts of them. Theoretical basics
and framework was gained by library method. Necessary information for calculations were collected through financial statements of the
accepted companies in Tehran Stock Exchange regarding to time period, and by the use of statistical methods the relation of the variables were
tested.

Statistical society and sampling method

The statistical society is all elements and individuals have one or more common feature in a specified geographical scale (global or
regional)(Hafezniya, 2006, 193). Theresearch statistical society was those companies has been active in the exchange during 2008- 2013. In this
period 571 companies have been active in Stock Exchange.
Sample is a number of the society members their features are the same as the society and they are representative of and homogenous with that
society member. Thus sampling is a set of which are performed to select a number of a society members who are its representative (Hafezniya,
2006, 121).
For determining the sample volume, systematic elimination has been used. And the selected companies have bellow conditions:
1. Sample companies have been active in Stock Exchange before the start of research period (2008) up to its end.
2. Their financial deadlock is not more than 150 days continually.
3. The company's financial years are without any change during researching.
4. Sample companies fiscal years ended 29/12.
5. Sample companies are not part of investing companies, banks or financial institutions.
6. Finally, the companies have available and complete information during researching.
Thus regarding to above conditions, 110 companies were selected as the research statistical society.

Calculating technique of the research variables

A. Conservatism
Conservatism measuring technique:
In this researchOhlson and Feltham model (1995) has been used for measuring the conservatism. For each year, the bellow regression model is
embedded during 3-years period:
=w0+w1
+w2oait+it
= unusual operational profit of each stock of the company i in year t
oait=net book value of operational assets of each stock in the company i in year t
if
w2 >0, it shows that the company has used conservative practices.
W2<0, it shows that the company has used impetuously practices.
Unusual operational profit, similar to Feltham and Oholson research is gain from bellow relation:
=oxit-roait-1
oxit= operational profit of each stock in the company i in year t
r= the expected output rate of the company i in year t

Mahdi Saghafi *, Azam Pouryousof

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International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.

B. Informational asymmetry
For calculating the informational asymmetry in Tehran Stock Exchange, the bellow model has been used. This model was used by Chiang and
Vikintash in 1986 for determining the proposed price domain of stock selling-buying. After him, the others used this model in their researches.
The above mentioned model is as follows:
=

100
+
)/2

In which
t= under-studied time period
i= under-studied sample
SPREAD= proposed price domain difference of stock selling-buying
AP (ASK PRICE) = average of proposed price of stock selling of the company i in period t
BP (BID PRICE) = average of proposed price of stock buying of the company i in period t
C. Used test and software
In this research Kolmogorov- Smirnov test was used for measuring the data normality. Since there are dependent and independent variables, the
regression is used for testing hypothesizes. Excel and spss software are used for data analyzing.

Analyzing the research variables

The below table shows Kolmogorov- Smirnov test used for measuring the normality of informational asymmetry varying data during the
company decadence stage.
Table 1. Kolmogorov- Smirnov test used for measuring the normality
Number
average
Standard deviation
Absolute value limit
Positive limit
Negative limit
Kolmogorov- Smirnov amount
Meaningfulness level

80
0.015
0.0074
0.134
0.134
-0.080
1.2
0.111

The above table shows that meaningfulness level of Kolmogorov- Smirnov test for variables data of informational asymmetry is more than 5%.
Data of this variable follows the normality distribution. Also since the maximum variable of conservativeness equals 1 and its minimum is 0, and
data has no? so it follows normality distribution.
Table 2. Description of frequency percent of conservative and non-conservative companies during mature stage
Indexes
Impetuous companies
Conservative companies
Total

Number
35
45
80

Frequency
43.8
56.2
100

Frequency percent
43.8
56.2
100

Cumulative percent
43.8
100

Above table shows that 43.8% of 80 companies which are in decadence stage follow impetuous practices and 56.2% are conservative.
Table 3. Centralindexes and variables data dispersion of informational asymmetry

Number
Average
Mean
Mode
Standard deviation
Domain
Minimum
Maximum

80
0.0155
0.015
0
0.0074
0.046
0.000
0.046

Above table shows that the average of informational asymmetry of the companies during mature stage is 0.0155 and their standard deviation is
0.0074.

Testing the research hypothesis

There is a relation between conservatism and informational asymmetry during decadence stage.
H0: There is no relation between conservatism and informational asymmetry during decadence stage.
H1: There is a relation between conservatism and informational asymmetry during decadence stage.

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Studying the Relation between Informational Asymmetry and Conservatism during Inaction Stage in Accepted Companies in Tehran Stock Exchange
International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.

Table 4. Pierson test for third hypothesis

Studying the relation between conservatism and informational asymmetry

asymmetry
Dependent variable
Independent variables
result
sig
Correlation coefficient
No relation
0.809
0.028
Conservatism

Table 5. Regression coefficients

Meaningfulness level

0/00

12/09

0/809

0/243

Beta

0/028

0/001

B
(coefficient)
0/015

Fixed amount

0/002

0/000

conservatism

Standard error

variables

(probability) F: (0.809) 0.059

Determination coefficient:(R2 ) 0.001
Durbin Watson amount: 1.99
Dependent variable: asymmetry

Above table shows that Durbin-Watson amount is 1.99, and since this amount is between 1.5 and 2.5, so the assumption of the errors
independency is accepted. Also we see correlation coefficient in this table that is 0.028 signifying there is no correlation between dependent
variable and independent variable. Determination coefficient is 0.001. Sothe model specification amount by independent variable is zero, thus
one can say that independent variable couldn't specify the model. Also we see that meaningfulness level(sig) of Fisher test is more than 5%, so
there is no linear relation between two variables.
Above table show that meaningfulness level of test t for conservatism is more than 5%, so regression equation can't be designed. Thus H0 is
accepted and H1 is rejected; that is there is no relation between conservatism and informational asymmetry during decadence stage.

Graph 1. Dispersion for third hypothesis

Conclusion
For testing this hypothesis saying that there is a relation between conservativeness and informational asymmetry during decadence, regression
has been used. In table 4 we see that correlation coefficient amount is 0.028 showing there is no relation between two variables. According to
table 5, Durbin-Watson amount is 1.99 showing errors independency. And the model specification amount by independent variable is zero, so
one can say that the model has not been specified by independent variable. Also the test F meaningfulness level is more than 5%, so the linear
relation between the variables is not accepted. Sincethe pre-requisite of hypothesis (not linear-relation) has not satisfied, obtaining results from
the coefficients table is impossible. We see in the coefficients table that test t meaningfulness level for the coefficients of variable
conservativeness is not meaningful. So the variables can't participate in the equation and affect dependent variable (informational asymmetry).
There is no relation between conservativeness and informational asymmetry during decadence stage. Thus regarding to this fact that there is no
relation between informational asymmetry during inaction stage (one of the company life cycle), it is proposed that for being assured of
informational asymmetry decrease dont rely on conservative accounting.

Mahdi Saghafi *, Azam Pouryousof

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International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.

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