Investigating the Interaction of Earning Quality and Information Asymmetry in the Banking Industry Using Simultaneous Equation System

Document Type : Research Paper

Authors

1 M.A. of Accounting, Shiraz University, Shiraz, Iran.

2 Assistant Professor of Accounting, Shiraz University, Shiraz, Iran.

10.22103/jak.2021.16217.3296

Abstract

Objective: Accounting information in financial markets is as a basis for deciding on the optimal allocation of limited financial resources. Also it is performance appraisal and the perspective of cash flows of investments or loans granted by the organization. Economic decisions of depositors and borrowers in the banking industry are made based on the quantity and quality of their information. The information of these banks, including earnings, must have the necessary quality characteristics in order to distribute financial resources among the members of the society in the best way along the decisions of information users. This can lead to an improvement in the economy and the growth of the banking system. Therefore, the purpose of this study is to investigate the interaction between earning quality and information asymmetry in the banking industry.
 Method: To achieve the purpose of the research, data of 11 banks listed on the Tehran Stock Exchange (TSE) and Iran of OTC during a period of 11 years for the years 2007-2018 using the Rah Avard Novin, financial statements and the official site of the Tehran Stock Exchange was collected and analyzed using the structural equation method (SEM) and the two-way Granger causality test.
 Results: The findings showed that information asymmetry in the banking industry is high and their earning quality is low. Information asymmetry has a negative effect on earning quality. On the other hand, if the quality of earning is low, it will increase information asymmetry. As a result, earnings quality also has a negative effect on information asymmetry. Finally, bilaterally, these two variables are the cause and effect of each other and have interaction.
The most important risk of the banking industry is their credit risk, which is due to the increase in debt to banks' capital. Another point is that most of the assets of banks are receivables from the provision of facilities, but depending on the steps through which the repayment of receivables, policies and regulatory tools can be repaid can lead to instability of banks.
Conclusion: In the banking industry, the information gap is high, so the manager can present the amount of declared earning in the financial statements differently from the actual earning. In this case, the quality of earning decreases and leads depositors and borrowers to incorrect financial decisions. Wrong economic decisions lead to incorrect distribution of financial resources among members of society. In order not to reflect the instability of banks, managers may manage their profits, which implies low profit quality, and as a result, other people active in the capital market will be deprived of complete and transparent information within the organization. These conditions increase the information asymmetry surrounding the banking industry.

Keywords

References

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History

  • Receive Date: 03 August 2020
  • Revise Date: 27 February 2021
  • Accept Date: 25 May 2021

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