International Journal of Scientific Research in Knowledge, 2(1), pp. 28-37, 2014 Available online at http://www.ijsrpub.

com/ijsrk ISSN: 2322-4541; 2014 IJSRPUB http://dx.doi.org/10.12983/ijsrk-2014-p0028-0037

Full Length Research Paper The Conservatism in Accounting and Its Effect on Earnings Response Coefficient in Tehran Stock Exchange Listed Companies
Abbas Ramezanzadeh Zeidi1*, Zabihollah Taheri2, Ommolbanin Gholami Farahabadi3
1

Department of Accounting, Neka Branch, Islamic Azad University, Neka, Iran 2 Department of Accounting, Payamenour University, Sari, Iran 3 Department of Accounting, Payamenour University, Neka, Iran *Corresponding Author: E-mail: Rameznzadeha@yahoo.com
Received 11 November 2013; Accepted 27 December 2013

Abstract. The main purpose of this research is to investigate the relationship between conservatism and earnings response coefficient. For conservatism the book-to-market ratio and for measurement of earnings management Ohlson's valuation model is used. The statistic population of the research includesthe listed companies in Tehran Stock Exchange and the samples include 154 companies over the period of 2007 to 2012. Using the panel regression analysis, several models have been estimated and the hypotheses have been examined. Results show that there is negative and significant relationship between conservatism and earnings response coefficient. Keywords: Conservatism, Earnings Response Coefficient, Earnings per Share

1. INTRODUCTION Conservatism has been a controversial concept since accounting started as a science, and it has a significant role in the practice of accounting. Basu believes that conservatism has affected both theoretical and applied accountings for centuries. Historical records of the early 15th century concerning partnership and collaborative trade trades show that accounting has been conservative in Medieval Europe. Conservatism is one of the dominant features of financial reports which have attracted more attention due to scandals (in companies like Enron and WorldCom). Some recent studies, such as Watts (2003), Roychowdhury and Watts (2005), Lafond and Watts (2006), are specifically focused on conservatism. The notion of conservatism was introduced when the balance sheet was the most important, if not the only, financial report, and the components of earnings and other operational results were less often presented out of the companies. In securities market, investment decisions are affected by factors like news media, analysts, and financial reports of companies. Therefore, different responses of investors towards earnings information lead to different responses by the market. But what are the reasons behind the different responses of the market? Scott, in his book titled financial accounting

theory, presents several reasons including systematic risk (beta), quality of earnings, continuation of profitability or loss, opportunities for investment growth, and capital structure. Thus, in earnings response coefficient two variables must be determined; abnormal returns and unexpected earnings. New securities market values that react to new information can be observed. In fact, the response of the securities market for a number of unexpected earnings is higher for some companies. Earnings response coefficient is different responses of the market to the earnings information. In other words, earnings response coefficient measures the unexpected output in response to the unexpected earnings reported by the companies which publish the securities (Khoshtinat et al., 2008). One of the factors that may lead to a different response of the market to earnings information is conservatism. Many researches have been done on the responses of the market to earnings information. Based on such researches, since the notions of conservatism and earnings response coefficient are applied in accounting differently for financial reporting, and each one can affect the quality of financial reporting, and hence affect the efficiency of investment market and the behavior of investors, creditors, and in general behavior of all who use the financial lists, it seems that investigating the relation

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between these two factors can contribute to the literature of this issue. In this study, the researcher tries to answer the question of whether conservatism in accounting approaches affects the earnings response coefficient, and what is the response of earnings coefficient of each share in such companies. 2. BACKGROUND AND LITRATURE REVIEW Many researches have been done concerning the earnings response coefficient and the factors affecting it. According to these studies, the investors decisions lead to the market response. The new values of the securities market which respond to the new information can be observed. The first evidences of the securities market response to publishing and announcement of earnings were provided by Ball and Brown (1986). In addition to demonstrating the market response to publishing the earnings according to the prediction, they measured the amount of the response in forms of mean and average. They showed that investors response to the companies with good news resulted in unexpectedly positive outcome and to the companies with bad news led to unexpectedly negative outcome. Ball and Brown applied the average of unexpected securities in their research. This average can cover a high amount of deviation from the mean. Thus, the unexpected outcome is probably at the average level for some companies and below the average for some others. Vikil (1990) investigated the effect of audit change on the earnings quality and the earnings response coefficient. He hypothesized that earnings response coefficient in the companies that had changed their audit would face a significant change; however, he could not prove his hypothesis based on the statistic results. In a research trying to provide a way to interpret the market from the published and announced information of earnings, Ceris and Samer (2005), directly related earnings response coefficient with continuation of profitability trend. This research differs from other researches concerning the effect of continuation of profitability trend on the earnings response coefficient in that it considered the continuation of unexpected earnings trend as the effective variable rather than the continuation of profitability trend. Moreover, in interpretation of the earnings response coefficient, rather than dividing it into two levels, stable and instable, it is divided into several new levels. The findings proved the relation between the variables of the research. Tosh, Zayang and Jian (2005), tried to show that the companies which disclose the increases due to keeping in profits and incomes have a more earnings

quality and higher earnings response coefficient in comparison with those companies that disclose only increases due to keeping in profit. Their research findings proved their assumptions. In a research, Louis (2011) investigated the relation between conservatism accounting and the value of kept cash money with that of abnormal outcome of a company. He found that conservatism accounting affects positively the relation between kept cash money and future operation of the company. In addition, the results prove that conservatism accounting is related to optimal use of available cash of the company. The results also supported the view that conservatism accounting can be are placement for foreign supervision, resulting in expense decrease. Abed et al. (2012) investigated a level of conservatism in accounting and its relation with earning management. The results of their research showed that levels of conservatism differ in different companies. They also found that conservatism and earnings managements are negatively correlated. Khoshtinat and Joshghani (2006) examined the effects of financial leverage on earnings response coefficient in Tehran Stock Exchange listed companies. The objective of their research was to answer the question of whether investors and analysts consider the capital structure of the companies and how much leverage they were in their response to good and bad news resulting from publishing accounting information, and whether their response affected such news. In this research, they employed the balance sheet approach to measure financial leverage. In the balance sheet approach two definitions are given for leverage: the ratio of debt to assets and the ratio of debts to the share holders right, both of which have been considered in this research. Investigation of the only hypothesis by regression analysis during the period of 2000-2004 shows that in the first definition of leverage in the entire sample and in the second definition of leverage in the high level of leverage, there are negative relations between the financial leverage and the earnings response coefficient. However, in the first definition of Leverage in the low level and in the second definition in the entire sample in the low level no significant relation was observed between the financial leverage and the earnings response coefficient. Ahmadi (2008) studied the relation between the earnings quality and earnings response coefficient. In this study the qualitative characteristics of financial information are used to evaluate the earnings quality. In this research, firstly, the dimensions of relevance and reliability benefits have been separately estimated using time series analysis and combined data methods. Companies were classified on the basis of high and low earnings quality based on cluster analysis. In

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order to test the hypothesis Ohlsons model (regression price-profit) was used. The findings show that the earnings response coefficient as well as the explanatory power of the regression (cost-benefit) is significantly higher in portfolio of companies with high quality of earnings than companies with low quality of earnings. Thus, both hypothesis of the research were proved. 2.1. The Statistic Population In the present study, to test the hypotheses classified financial data of listed companies in Tehran Stock Exchange has been used. Samples were limited to the companies with the following specifications: 1) The end of the financial year of the company was the end of Iranian calendar year. 2) The company did not have a change of the financial year in two succeeding years. 3) The financial data of the company for the study period was accessible. 4) The company was not one of the investment companies, leasing and banks due to the nature of their activities. Considering the mentioned limitations, 154 companies were selected for the study. 2.2. The Research Hypothesis Based on the preliminary studies, the research hypothesis is as follows: There is a significant correlation between conservatism and earnings response coefficient. 3. METHODOLOGY This research is based on descriptive-exploratory approach. It studies the present situation, describing it systematically, and examines characteristics and features of the present situation in relations between the variables. This type of research is not only practical in the area of decision-making and planning but is also fundamental since it leads to scientific facts based on inductive method. 3.1. The Operational Definition of Variables and the Way They are calculated Dependent Variable (Earnings Response Coefficient), The earnings response coefficient measures the unexpected yield of the market in response to the unexpected component of reported earnings by a company that has securities sites. In other words, the earnings response coefficient measures the sensitivity of the market to declaration of profit by the slope coefficient of the regression of abnormal returns and

unexpected earnings (Scott, 2003). In this research, the dependent variable is the earnings response coefficient. The earnings response coefficient, which measures the reaction of the market to changes of profit of each share and is derived from a regression of price and earnings per share, accounts for the way the information regarding profit can affect the stock price. The assessment model, based on Ohlsons , is as follows. Following Barth et al. (1999), the researcher added two variables, namely risk and growth, to the equation so that the effects of other variables can be controlled. The desired variable in this research is the EPS coefficient. Price = 0 +1 BVE + 2 EPS + 3 (EPS * DE) + 4 (EPS *EVAR) + Price: The price of each share at the end of the financial year BVE: Book Value of each share EPS: Earnings per share before unexpected items DE: Debt to equity ratio (risk) EVAR: The change percentage in earnings of per share 3.2. The Independent Variable Conservatism is one of the dominant features of financial reporting which have attracted more attention in recent years due to financial scandals (in companies like Enron and WorldCom). The independent variable in this research is conservatism. According to previous studies (Ahmad et al, 2002; Zhang, 2007; Lobo et al, 2008), the ratio of the book value to the market value of equity is considered as the representative of conservatism. The ratio of book value to market value of equity being less than one is an indication of accounting conservatism. 3.3. The Control Variables 3.3.1. Size Zimmerman (1983) states that big companies are more conservative due to more political sensitivity (Political Cost Theory). In the present research, the natural logarithm of total assets of the end of period is considered as the indication of the company size. 3.3.2. Operation Operation, measured through ROE, is calculated by dividing the earnings, after tax deduction, on the total shareholders equity at the end of the period. 3.3.3. Financial Leverage Accounting methods are related to financial leverage

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Zeidi et al. The Conservatism in Accounting and Its Effect on Earnings Response Coefficient in Tehran Stock Exchange Listed Companies

since one of the criteria which is considered by the creditors in Iran, i.e. banks, is the ration of debts of the company. Therefore, the higher the ratio of debt of a company is, the less intention it will show to use conservatism methods. Consequently, company managers are expected to apply less conservative methods in their financial statements in order to reduce the risk of rejection of loan applications and to avoid incurring higher interest costs. This variable is defined as total debts to total assets at the end of period. This ratio is calculated by dividing total debts to total assets. 3.4. Earnings Management According to previous studies, discretionary accruals in a company represent earnings management. Residual values of the modified Joness model of accruals, that is, discretionary accruals are employed in this research as the criterion of earnings management. 3.5. Analyses Concerning the Main Model of the Research The hypothesis of this research concerns the relation between conservatism and earning response coefficient. This relation is also considered in the

main model of the research. To examine such a relation, in this research, Ohlsons general model of assessment was employed. To examine the main model of the research, the interactive variable of conservatism index (the ratio of book value to market value) and earnings per share is included in the main model. In this research, to control the effects of some factors according to previous studies, the researcher will consider the variables of the ratio of debt to shareholders equity and percentage of change in earnings per share, size, yield of shareholders equity, earnings management as control variables, the impact of which will be assessed as interactive relationships. 3.6. Descriptive Statistics of the Main Model Variables The descriptive statistics of the variables include central, dispersion, and distribution indexes. In this research, information related to mean and median from central index, standard deviation related to dispersion index, and stretching and skewing related to distribution index are presented. In addition, in this figure, Jarque -Bera statistic and the related level of significance are presented for examining the normality of the variables distribution. The descriptive statistics of the main model variables are given in table (1):

Table 1: Descriptive Statistics of the Main Model Variables

EM -4.50E-12 0.003025 2.004014 -4.414097 0.233599 -6.818365 154.5776 857948.6 0.000000 ROE 0.405161 0.261357 83.21339 -55.91304 5.445384 4.407300 131.4621 624521.4 0.000000 SIZE 13.38333 13.17000 19.62000 9.820000 1.483872 0.808653 4.018428 137.1351 0.000000 EVAR 11.26447 -7.996947 12526.78 -34126.57 1524.559 -11.82005 296.2156 3291906. 0.000000 DE 2.063388 1.730000 303.3700 -201.1100 15.02313 3.696714 245.1163 2236983. 0.000000 CONS 0.880815 0.550846 131.8100 -30.02000 4.854001 22.24455 591.4461 13218915 0.000000 EPS 639.5525 468.5200 13448.11 -3891.480 1170.477 3.038666 27.01835 23555.15 0.000000 BV 1885.271 1304.230 211071.0 -21855.54 7914.886 22.18468 556.7610 11688980 0.000000 P 4394.933 2458.000 58414.00 150.0000 5685.128 4.270578 30.60352 31761.20 0.000000 Mean Median Maximum Minimum Standard Deviation skewing stretching JarkkoBra probabilit y

Observations show that the average price of each share of the sample companies is about 4395 Rials. The book value per share is about 1885 Rials in average, and the earnings per share is average about 600 Rials. These three are the basic variables of Ohlsons assessment model which all have positive skewing and stretching. Positive stretching indicates that the curve of variables distribution is longer than normal distribution. As it is also observed from the Jarque-Bera and the related level of significance, the three variables do not have a normal distribution. Observations indicate that the conservatism index of the sample companies is about 0.88 in average. As

it was already mentioned, in Jain and Rezaees (2004) belief, the ratio of book value to market value of equity being less than one is an indication of accounting conservatism. Since this proportion is less than one in the sample companies, in these companies there is conservatism accounting. In half of the companies the ratio of book value to the market value is more than 0.55, and in the other half this ratio is less than 0.55. The debt of the sample companies is averagely about two times of their shareholders equity. The mean of change percentage of earnings per share shows that the earnings per share of the companies have changed nearly 11.26 units during the

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period of this research. The yield of shareholders equity of the research samples is about 40 percent. The discretionary accruals, which indicate earnings management, is -4.50E-12. The minus mark shows a negative relation between earnings management and earnings response coefficient. 4. RESULTS AND DISCUSSIONS

4.1. Examining Correlation between the Main Model Variables In this section, using Pearson's correlation coefficient, existence and direction of correlation between the variables of the model of response coefficient is examined. The correlation coefficient matrix is given in table (2).

Table 2: Correlation coefficients between the variables of the main model

Price Price Book Value Earnings Share per 1.000000 ----0.022718 0.5157 0.683421 0.0000 -0.066695 0.0561 -0.007256 0.8355 -0.168266 0.0000 0.001632 0.9627 0.053068 Book Value Earnings per Share Conservatis Ratio m Debt of Growth Size Yield of Earnings Shareholder Management s Equity

Conservatism Ratio of Debt Growth Size

Yield of Shareholders 0.1287 Equity 0.052717 Earnings Management 0.1312

1.000000 ----0.005685 0.8708 0.293781 0.0000 -0.003611 0.9177 0.013576 0.6977 -0.001908 0.9565 0.002673 0.9390 -0.021509 0.5383

1.000000 -----0.046933 0.1791 0.015985 0.6474 -0.113545 0.0011 -0.019292 0.5810 0.032689 0.3496 0.317746 0.0000

1.000000 -----0.004290 0.9023 0.025005 0.4743 0.003455 0.9213 -0.008871 0.7997 -0.028300 0.4180

1.000000 ----0.029123 0.4046 -0.020919 0.5495 -0.021218 0.5438 0.019435 0.5782

1.000000 -----0.008114 0.8164 -0.002386 0.9456 -0.029490 0.3987

1.000000 -----0.040396 0.2476 -0.007237 0.8360

1.000000 ----0.009058 0.7955 1.000000 -----

As it is seen in this table, considering the level of significance related to correlation coefficient between the variables, the intensity of the relationship between the explanatory variables of the main model is weak or average, and a strong correlation between the explanatory variables is not observed. Therefore, simultaneous entry of variables in the research model would not interfere in terms of linear time. 4.2. Tests Related to Main Models of the Research Test of the main model is performed at 95% certainty level based on multiple variables regression, and in estimating the general model combined data analysis will be used. In this analysis, first to choose a suitable model, Chow test (for choosing a model with or without effects) and Hausman test (for choosing a model with fixed effects) are used. For examining significance of the regression model Fishers statistic,

for examining the significance of the regression model coefficients Studentst statistic, for examining autocorrelation between observations Durbin-Watson statistic, and for examining explanatory power of the model the adjusted coefficient of determination statistics are used. 4.3. Tests Related to the Model of Correlation between Conservatism Index and Earnings Response Coefficient To choose a suitable model, Chow test and Hausman test were used. The results of these tests are given in table (3). Considering the F statistic of Chow test and the amount of probability (less than 0.05) the model with effects is suitable. According to the of Hausman test and the amount of probability (less than 0.05), the model with fixed effects is suitable.
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Zeidi et al. The Conservatism in Accounting and Its Effect on Earnings Response Coefficient in Tehran Stock Exchange Listed Companies

Table 3: The Results of Choosing a Model for Model Test of Relation between Earnings Management and Earnings Response Coefficient
Probability Freedom Degree 0.0000 0.0000 (153.748) 3 Amount Statistic 5.161335 226.473606 F Chow Test Hausman Test of Test Statistic Test Type

Table 4: Estimating the model of relation between conservatism index and earnings response coefficient
Dependent Variable: P Probability Statistict 0.0000 0.0045 0.0000 0.0096 25.62276 0.000000 60.72331 2.849427 14.87372 -2.595162 Fishers statistic Probability of Fishers Statistic Standard Error 59.15273 0.031100 0.087276 0.042242 Coefficients 3591.950 0.088617 1.298114 -0.109625 0.809490 1.872307 Explanatory Variables C Book Value Earnings per Share Interactive relationship between conservatism and earnings per share adjusted coefficient of determination statistic Durbin-Watsons Statistic

P = 3591.950 + 0.088617*BV + 1.298114*EPS - 0.109625*CONS*EPS + [CX=F]

The results of estimating the model by fixed effects method are given in table (4). Analyzing the results of model estimating, the followings can be concluded: the t statistic and probability (less than 0.05) indicate the significance of both book value per share and earnings per share. Moreover, the width of source of the model affects the model positively and significantly. Considering the fact that the variable coefficient of earnings per share in the model is 1.298114, the market price of each share responds positively and significantly to the changes of earnings per share. In other words, the earnings response coefficient is positive. In this model, correlation between conservatism and earnings response coefficients is performed through examining the interactive variable. The t statistic and the probability (less than 0.05) indicate the significance of the interactive variable. Of course, the negative coefficient of the interactive variable indicates a negative and significant correlation between the index of conservatism and earnings response coefficients. In the first model of earnings response coefficient, the variable coefficient of earnings per share in the model is 2.002890. In other words, earnings response coefficient is positive, and the market price of each share responds positively and significantly to changes of earnings per share. In the model of correlation between conservatism index and earnings response coefficient, the variable coefficient of earnings per share in the model is 1.298114. In other words,

earnings response coefficient is positive and the market price of each share responds positively and significantly to changes of earnings per share. Decrease in coefficient of earnings per share represents the impact of conservatism interactive variable on earnings response coefficient, a fact which is in accordance with the research findings. The adjusted R2 statistic of the model indicates that nearly 80 percent of changes in the market price of each share can be explained by the explanatory variables, while the adjusted R2 statistic of the first model, without the presence of the interactive variable of earnings management is about 37 percent. This increase of approximately 43 percent in adjusted coefficient of determination is another reason for the interactive role of conservatism in the model, and it can account for high reaction of the market price of each share to the changes of earnings per share. Durbin-Watson statistic of the model is 1.872307, and this rejects the assumption of autocorrelation between the elements of the model. 4.4. Tests Related to the Model of Correlation between Conservatism Index and Earnings Response Coefficient at the Presence of Control Variables (Ration of Debt and Growth) To choose a suitable model, Chow test and Hausman test were used. The results of these tests are given in table (5). Considering the F statistic of Chow test and the amount of probability (less than 0.05) the model

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with effects is suitable. According to the X2 of Hausman test and the amount of probability (less than 0.05), the model with fixed effects is suitable.

The results of estimating the model by fixed effects method are given in table (6).

Table 5: The Results of Choosing a Model for Model Test of Correlation between Earnings Management and Earnings Response Coefficient at the Presence of the Control Variables
Probability 0.0000 0.0000 Freedom Degree (153.731) 5 Amount of Statistic 7.317205 246.543710 Test Statistic F Test Type Chow Test Hausman Test

Table 6: Estimating the model of correlation between conservatism index and earnings response coefficient at the presence of the control variables of leverage and growth
Dependent Variable: P Probability Statistict 0.0000 0.0270 0.0000 0.0062 0.0023 0.0000 28.81274 0.000000 70.17480 2.215518 13.78846 -2.743143 3.053633 -11.20461 Standard Error 52.32307 0.009979 0.078471 0.034362 0.003992 1.14E-05 Coefficients 3671.761 0.022108 1.081997 -0.094261 0.012191 -0.000128 0.834353 1.958772 Explanatory Variables C Book Value Earnings per Share Interactive correlation between conservatism and earnings per share Interactive correlation between ratio of debt and earnings per share Interactive correlation between growth and earnings per share adjusted coefficient of determination statistic Durbin-Watsons Statistic

Fishers statistic Probability of Fishers Statistic

P = 3671.761 + 0.022108*BV + 1.081997*EPS - 0.094261*CONS*EPS + 0.012191*DE*EPS - 0.000128*EVAR*EPS + [CX=F]

Analyzing the results of model estimating, the followings can be concluded: the t statistic and the probability (less than 0.05) indicate the significance of both book value per share and earnings per share. Considering the fact that the variable coefficient of earnings per share in the model is 1.081997, the market price of each share responds positively and significantly to the changes of earnings per share. In other words, the earnings response coefficient is positive. The variable coefficient of earnings per share in this model decreased in comparison with the previous models. This means that earnings response coefficient in the model with the interactive role of conservatism and with the control variables is decreased compared with the previous situation in which the control variable were not present, indicating that the control variables affects the model. The adjusted R2 statistic of the model indicates that nearly 83 percent of changes in the market price of each share can be explained by the explanatory variables. The adjusted coefficient of the model with interactive role of conservatism is higher than the previous models. Durbin-Watson statistic of the model is 1.958772, and this rejects the assumption of autocorrelation between the elements of the model.

4.5. Tests Related to the Model of Correlation between Conservatism Index and Earnings Response Coefficient at the Presence of Control Variables (Ration of Debt, Percentage of Earnings Changes, Size, Profitability, and Earnings Management) Analyzing the results of model estimating, the followings can be concluded: the t statistic and the probability (less than 0.05) indicate the significance of both book value per share and earnings per share. Considering the fact that the variable coefficient of earnings per share in the model is 1.196885, the market price of each share responds positively and significantly to the changes of earnings per share. In other words, the earnings response coefficient is positive. The variable coefficient of earnings per share in this model has increased in comparison with the previous models. This means that earnings response coefficient in the model with the interactive role of conservatism and with the control variables (yield and earnings management) is again increased compared with the previous situation, showing the role of the newly added control variables. Among the newly added control variables, the size is not significant, the control variable of yield has a positive and significant

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Zeidi et al. The Conservatism in Accounting and Its Effect on Earnings Response Coefficient in Tehran Stock Exchange Listed Companies

effect on the model, and the earnings management has a negative and significant effect. The adjusted R2 statistic of the model indicates that nearly 89 percent of changes in the market price of each share can be explained by the explanatory variables. The adjusted coefficient of the model with interactive role of

conservatism is higher than the previous models. Durbin-Watson statistic of the model is 1.921116, and this rejects the assumption of autocorrelation between the elements of the model.

Table 7: Estimating the model of correlation between conservatism index and earnings response coefficient at the presence of control variables
Probability 0.0000 0.0166 0.0001 0.0129 0.0001 0.0000 0.6212 0.0255 0.0000 43.44999 0.000000 Statistict 87.78062 2.402697 4.026930 -2.492503 3.903452 -14.66161 0.494354 2.239226 -7.405852 Dependent Variable: P Standard Error Coefficients 39.85992 0.036095 0.297220 0.049813 0.005418 8.93E-06 0.020782 0.019164 0.083784 3498.928 0.086725 1.196885 -0.124159 0.021150 -0.000131 0.010274 0.042912 -0.620493 0.892406 1.921116 Explanatory Variables C Book Value Earnings per Share Interactive correlation between conservatism and earnings per share Interactive correlation between ratio of debt and earnings per share Interactive correlation between growth and earnings per share Interactive correlation between size and earnings per share Interactive correlation between yield and earnings per share Interactive correlation between earnings management and earnings per share adjusted coefficient of determination statistic Durbin-Watsons Statistic

Fishers statistic Probability of Fishers Statistic

P = 3498.928 + 0.086725*BV + 1.196885*EPS - 0.124159*CONS*EPS + 0.021150*DE*EPS - 0.000131*EVAR*EPS + 0.010274*SIZE*EPS + 0.042912*ROE*EPS - 0.620493*EM*EPS + [CX=F]

5. CONCLUSION In this research, first the interactive variable of conservatism was fitted without control variables. The results show that the earnings response coefficient is positive and its amount is less than the primary situation without the interactive variable of earnings management, indicating that the interactive variable of conservatism affects the model. In the second stage, the interactive variables of risk and growth in form of interaction were inserted into the model together with the interactive variable of conservatism. In this case, the findings showed a positive earnings response coefficient, yet the amount was less than the first case in which no control variable was present. This indicates that the control variables of risk and growth influence the amount of earnings response coefficient. In the last stage, the interactive variables of size, yield of shareholders equity, and earnings management were inserted into the model. The findings in this case, too, show a positive earnings response coefficient. This time, also, the earnings response coefficient was higher in comparison with the previous situation in which only two variables of growth and risk were present, indicating the effect of

new control variables on the changes of earnings response coefficient. In general, it can be concluded that there is a negative and significant correlation between conservatism and earnings response coefficient, and adding the interactive variable of conservatism will lead to reduction of earnings response coefficient in the model. Suggestions for Future Studies: 1- It is suggested that the role of earnings smoothing on statement of earnings response coefficients are examined. 2- It is suggested that time-series properties of earnings, including earnings persistence, earnings predictability and the like should be considered in the evaluation of earnings response coefficients. 3- It is suggested that earnings response coefficient is separately investigated in different bourse industries. REFERENCES Abed S, Al-Badainah J, Serdaneh JA (2012). The Level of Conservatism in Accounting Policies and Its Effect on Earnings Management. International Journal of Economics And Finance, 4(6): 78-85.

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Zeidi et al. The Conservatism in Accounting and Its Effect on Earnings Response Coefficient in Tehran Stock Exchange Listed Companies

Abbas Ramezanzadeh Zeidi received his MA in Accounting from Tehran Branch, Islamic Azad University. Currently, he is PhD Candidate at AMU India. He has more than 20 papers in the referees journals and conferences. He is faculty member of Neka Branch, Islamic Azad University.

Zabihollah Taheri received his MA in Accounting from Tehran Branch, Islamic Azad University. He is faculty member of Payamenour University, Sari, Iran.

Ommolbanin Gholami Farahabadi received her MA in Accounting from Payamenour University, Behshahr, Iran. She is faculty member of Payamenour University, Neka, Iran.

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