The Impact of Bad News on Conservatism Motivation in Accounting

Objective: In the last two decades, numerous studies have influenced conservatism and examined various changes. Findings show that financial reporting has been conservative in many markets (Hassan, 2021). These studies have focused less on conservative motives. There is no consensus on whether conservatism improves corporate status and managerial performance (Bertmo et al., 2017). Nevertheless, this issue in the Iranian capital is still challenging and has received less empirical attention. There is no theoretical consensus on answering the question of whether conservatism improves corporate status and managerial performance. (Bertmo et al, 2017). However, this is still a challenge in the Iranian capital market and has received less empirical attention. Conservative motives are naturally caused by factors that the study of these factors and their impact on these motivations can reasonably answer the critical question of what motivates managers to use conservative methods and what factors have led managers to have these motivations. An issue hidden in this vast conservative literature and bad news that deserves serious discussion is the future and behavior of the company following this news, which results from predictions and estimates based on current and past information. Undoubtedly, managers will be among the first to react to this information and the predictions formed based on it and will change their motivations to continue working in the management position accordingly. Accounting conservatism motives or conservative tendencies indicate the level of subjectivity in identifying the interests that managers or accountants pursue that approach. On the other hand, it was stated that managers have different motives and, accordingly, show conservative behaviors. These motives are possible. This study examines the three contractual, tax and political motivations of managers from conservative methods. Contractual motive refers to contracts between the company and its stakeholders; Conservative tax incentive indicates the level of delays in revenue recognition due to tax deferrals and states the legal motive for exercising conservatism because it does not face judicial consequences. One of the important factors that can lead to different motivations of managers to operate in companies is the situation and news of the company, which, based on past and present information, can predict the future to some extent and make decisions based on it. (Hosseinafshari et al, 2021). These adverse indicators can reduce the value of assets. Because managers have different motivations for using conservative methods, the importance of this issue has increased and perhaps the answer to the question of how bad news affects conservative motives. Be able to fill the gap between application and research.
Method: In this research, both library and correlation methods are used mixedly. The statistical population of this research is all companies listed on the Tehran Stock Exchange from 2011 to 2021. After applying the restrictions, 163 listed companies were selected as a sample. To test the research hypotheses, multiple regression analyses have been used. Based on the theoretical foundation, these hypotheses were developed and tested:
H1: Bad news increases the conservative contractual incentive by reducing debt.
H2: Bad news increases conservative tax incentives by lowering tax rates.
H3: Bad news increases the political motivation of conservatism by reducing the size of assets.
Results: The findings show that bad news does not significantly affect conservative contractual motivation. Findings from this test suggest that companies may pay less attention to good and bad news to finance themselves, build capital structure, and make decisions based on other policies. In this situation, political and cultural relations in the Iranian environment should not be overlooked when preparing financial resources. Based on these findings, it can be said that the first hypothesis of the research cannot be confirmed. Bad news at the 10% error level also has a significant positive effect on conservative tax incentives. The findings show that in the face of bad news, companies have been tax-motivated in conservative ways and, as a result, have identified costs more and more quickly and reduced tax rates compared to the previous year. In other words, the findings show that companies pursue their tax goals and incentives using conservative methods. Based on these findings, it can be said that the second hypothesis of the research cannot be rejected. The results of testing the third hypothesis indicate that bad news has caused companies to appear politically smaller to be safe from policymakers in poor financial conditions and to pay less costs to the government, including taxes. In other words, in the face of bad news about the company's financial and operating environment, companies try to show less of their assets through conservative methods and maintain their financial reserves for a negative outlook in the future.
Conclusion: The results showed that bad news companies did not affect the contractual motivation of companies, and companies did not significantly adjust their debt structure because of this and in these circumstances. To interpret these findings, we can point to the power of Iranian companies in debt financing. In times of financial crisis, financial constraints and bad news, they can establish relations with financing institutions through numerous political, cultural and social relations. Borrow this way. However, the findings in the second hypothesis show that bad news affects the company's tax incentive and increases it, and these findings are in line with the literature. In the face of bad news, companies showed less of their assets to be safe from politicians. Because of the ambiguity due to bad news forecasts, the company is likely to be financially constrained in the future, and companies should look for tricks to maintain financial resources for future consumption and thus maintain continuity. Based on these findings, it can be suggested that companies and their stakeholders review the company's news and information before making a decision and, based on this, predict the company's perspective and, by incorporating these forecasts, establish the next steps.