Stock market reactions to earnings management, corporate risk and weak internal controls

Subject Areas : Journal of Investment Knowledge

sid nia valinia ¹ (Ph.D. Student, Department of Accounting, Bandar Abbas Islamic Azad University, Bandar Abbas , Iran.)
Mohammed Hussain Ranjbar ² (Associate Professor, Department of Accounting, Bandar Abbas Islamic Azad University, Bandar Abbas , Iran)
daowd khodadady ³ (Assistant Professor, Department of Accounting, Bandar Abbas Islamic Azad University, Bandar Abbas , Iran)
hojat alaha salari ⁴ (Assistant Professor, Department of Accounting, Bandar Abbas Islamic Azad University, Bandar Abbas, Iran.)

Received: 2021-02-06 Accepted : 2021-04-04 Published : 2022-06-22

Keywords: Keywords: market reaction, Internal Controls, business and financial risk, manipulation of accruals,

Abstract :

AbstractThe main function of the capital market is to finance productive production and service activities. To achieve this important goal, the shares of companies listed on the capital market must be attractive enough for investors to invest. One of the most important indicators of the attractiveness of a certain company's stock for investors is the return on investment. The return on investment comes more than anything from changes in a company's stock price, and a company's stock price changes come from its internal information management. In this research, a model for the relationship between market reaction and weak internal controls, manipulation of accruals, business risk and financial risk is presented. This research is a purely experimental research, but, according to the analysis of past information, the statistical population of the research is all companies listed on the Tehran Stock Exchange in the period of 2007 to 2018. Finally, for statistical analysis, the calculated variables have been transferred to the Eviews9 software environment. The research findings show that the weakness of internal controls on the manipulation of real data, business risk and financial risk at the probability level. 5% has a significant effect. Manipulation of real information at the 5% probability level has a significant impact on financial and business risk. Manipulation of real information, financial risk and business risk at the 5% probability level have a significant impact on market reaction.

References:

• حجازی، رضوان و اسماعیلی کیا، غریبه (1392) تاثیر سیستم های برنامه ریزی منابع انسانی (ERP) بر اثربخشی کنترل های داخلی در رابطه با گزارشگری مالی، پژوهش های تجربی حسابداری ، سال سوم ، شماره 10 ، صص 47-23.


• حاجیها، زهره و سهیلا محمد حسین نژاد (1394) عوامل تاثیر گذار بر نقاط ضعف با اهمیت کنترل داخلی. پژوهش های حسابداری مالی و حسابرسی، سال هفتم ، شماره 26 ، صص 137-119.


• فروغی، داریوش و مهرداد آیسک، سید سعید (1394) بررسی واکنش بازار به زمان اعلام سود هر سهم پیش بینی شده ، پژوهش های تجربی حسابداری ریال سال پنجم ، شماره 17 ، صص 162-139.


• فخاری، حسین و کبیری، محمد تقی (1397) بررسی عوامل تعیین کننده افشای ضعف کنترل های داخلی شرکت های پذیرفته شده در بورس اوراق بهادار تهران ، تحقیقات حسابداری و حسابرسی، شماره 40 ، صص 25-40.


• فندرسکی، علی و صفری گرایلی، مهدی (1397) اثربخشی کنترل های داخلی و ریسک سقوط قیمت سهام، پژوهش های حسابداری مالی و حسابرسی، سال دهم ، شماره 38 ، صص 186-169.


• قائمی، فاطمه؛ مرادی، زهر و علوی، غلامحسین (1399) تاثیر ویژگی های کمیته حسابرسی بر کنترل های داخلی و مدیریت سود، پژوهش های حسابداری مالی و حسابرسی، سال دوازدهم ، شماره 46، صص 280-259.


• نوروزی، سیما.، رنجبر، محمدحسین و اسدنیا، جهانبخش (1399). ارائه مدلی از واکنش سرمایه‌گذاران و اعتباردهندگان به رفتار سودهای واقعی و پیش بینی شده فصلی، تحقیقات حسابداری و حسابرسی، بهار 1399، شماره 45، صص. 201-218.


• نوروزی، سیما؛ رنجبر، محمدحسین؛ و اسدنیا، جهانبخش (1400). واکنش بازار سرمایه به رفتار سود فصلی شرکتهای دارای فناوری سطح بالا، فصلنامه مطالعات میان رشته ای در علوم انسانی، 13 (3)، 184-157، پیاپی 51، تابستان 1400.


• وکیلی فرد، حمیدرضا و اوحدی، فریدون (1392). رابطه بین ضعف کنترل های داخلی و ریسک سیستماتیک، مطالعات کمی در مدیریت، سال چهارم، شماره دوم، صص 134-117.


• Aleta-Skaife, H. and Mouritiny. ( 2010). ” The discovery and reporting of internal control deficiencies prior to SOX-mandated audits“.


• An, P. Ge, W. and Schrand, C. (2018). Understanding Earnings Qquality: A Review of the Proxies, Their Determinants and Their Consequences, Working Paper, Haas School of Business, University of California, Berkeley.


• Babatunde, S. A., (2013). Stakeholders’ perception on the effectiveness of internal control system on financial accountability in the Nigerian public sector, International Journal of Business and Management Invention, 2(1), 16-33.


• Balsam, J & Lafond, R. & Olsson, p. & Schipper, K. (2019). Cost of Equity and Earnings Attributes. The Accounting Review, Vol. 19, Pp. 967-1010


• Baltasy, E. Yelmaz, K. (2016). Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics, Vol. 33, Pp. 3–56.


• Cheng, Q., Goh, B. W., Kim, J. B., (2015). Internal control and operational efficiency. European Accounting Association Annual Congress, April 28-30. Research Collection School af Accountancy. Available at: htp://ink.library.smu.edu.sg/soa_research/139.
  
  
  
  • Chen , A. Vissing-Jorgensen, P. (2017). ” Sapienza, A Lobbying Approach to Evaluating the Sarbanes- Oxley Act of 2002 .“Journal of Accounting Research, Vol. 47, pp. 519- 583.
  
  
  
  


• Chei Ji, Yang  (2014). ” Determinants and economic consequences of voluntary disclosure of internal control weaknesses in China“. Journal of Contemporary Accounting & Economics ،12(1), 61-72.


• Gardan, L. and Esmit, P. (2012). Stock Valuation and learning About Profitability. Journal of Finance, Vol. 58, Pp. 1749– 1789.


• Hamersaly , Z. A., Khan, M., Shakri, I, H., (2020). internal control effectiveness & its relationship with financial performance, IBT Journal of Business Studies (Formerly Journal of Management & Social Sciences), 11(2), 92-107.


• Haycham , M. and Khaled .,B. (2017). Presidential Address: liquidity and Price Discovery. Journal of Finance, Vol. 58, Pp. 1335–1354.


• Hejazi, R. Ismaili Kia, G. (2013) the effect of ERP resource planning systems on the effectiveness of internal controls related to financial reporting. Journal of Experimental Accounting Research.38-17, (2) 3.


• Hatoun, Chun-Chun, Hsueh-Ying Wu b , Yong-Fu Chang c (2015), The critical factors impact on online customer satisfaction, Procedia Computer Science 3276–281.


• Eshbough K,, Shin'ya O, and Masaru ,K. (2012). The Relationship Between Bank Risk and Earning Management: Evidence from Japan. Review of Quantitative Finance and Accounting, Vol. 22, Pp. 233-248


• Joseph, M. O., Ransome, K., Victoria, A.O., (2012). Effectiveness of Internal Control Systems of Listed Firms in Ghana, Accounting in Africa (Research in Accounting in Emerging Economies),12, 31-49.


• Jeni, K. and Mirez, L. (2015). Earnings Quality. Accounting Horizons, Vol. 17 (supplement), Pp. 97-110.


• Jon and Yaste E. (2017). Accounting Quality, Information Risk and Implied Volatility Around Earnings Announcements. Journal of International Financial Markets, Institutions & Money. Vol. 34, Pp. 188–207.


• Jacob, E. O, Philip, A. O. (2016). Effect of Internal Control on Financial Performance of Firms in Nigeria (A Study of Selected Manufacturing Firms), IOSR Journal of Business and Management, 18(10), 80-85.


• Kinyua, J. K. (2016). Effect of Internal Control Systems on Financial Performance of Companies Quoted in the Nairobi Securities Exchange, PH.D Thesis, JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY.


• Mouly, C. L. (2017). The Influence of Internal Control Implementation and Managerial Performance on Financial Accountability Local Government in Indonesia, International Journal of Economics and Financial Issues, 2017, 7(1), 293- 297.


• Muchiri, N. W., Jagongo, A. (2017). Internal auditing and financial performance of public institutions in Kenya: A case study of Kenya Meat Commission, African Journal of Business Management, 11(8), 168-174.


• Peterous, M. and Tomas,(2013). Estimating standard errors in finance panel data sets: comparing approaches. Review of Financial Studies, Review of Financial Studies 22, 435–480.


• Wang, K. & Chan, L. & Jegadeesh, N. & Lakonishok, J. (2018). Earnings quality and Stock Returns. Journal of Business, Forthcoming.


• Wahlen, J.M.,(1994) The nature of information in commercial bank loan loss disclosures. Accounting Review 69 (3), 455–478.


• Yazoua, N., Ejom, P. (2020). The Impact of Internal Control Activities on Financial Performance of Tertiary Institutions in Nigeria, Journal of Economics and Sustainable Development, 5(16),133-143.