EARNING QUALITY ACCOUNTING INFORMATION AND CAPITAL EXPENDITURE

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MOJTAHEDZADEH V.; AHMADI FATEMEH

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Journal: Journal of Accounting Advances Year:2009 | Volume:1 | Issue:1 (57/3) Page(s): 147-170

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Title

EARNING QUALITY ACCOUNTING INFORMATION AND CAPITAL EXPENDITURE

Author(s)

MOJTAHEDZADEH V. | AHMADI FATEMEH | Issue Writer Certificate

Keywords

QUALITY OF INCOMEQ2

ACCOUNTING INFORMATIONQ2

CAPITAL EXPENSESQ2

ACCRUAL ITEMSQ2

Abstract

Introduction: Capital projects are the most significant factors in creating value in the economy. Providing financial information is quite necessary for the optimal allocation of capital and the accounting system is a very important information source for managers to differentiate the appropriate capital projects from the inappropriate ones. High quality ACCOUNTING INFORMATION helps managers to identify the most ideal investment opportunities with the least errors possible (Bushman & Smith, 2001). According to the traditional theory of investment and the theory of Tobin’Q, ACCOUNTING INFORMATION do not play a role, but the accounting system provides additional information about investment opportunities beyond market information (Bond et al., 2004; Alti, 2003). The additional information assists in the prediction of final return and holds a significant value for managers in decisions regarding capital projects. The higher the quality of ACCOUNTING INFORMATION, the higher the optimality of investment decisions made. In rational decisions, precise information holds more weight and significance and investment decisions have a greater sensitivity towards accounting variables. Research Hypothesis: In the present study, the influence of the quality of ACCOUNTING INFORMATION on managers' decision makings was examined. The criterion for identifying the quality of ACCOUNTING INFORMATION is the QUALITY OF INCOME. For this purpose, the influence of the QUALITY OF INCOME as introduced by Dechow and Dichev (2002) on the sensitivity of capitalized expenses to the current year income and its accrual portion has been analyzed upon controlling future operational cash flows and Tobin’Q and the following two hypotheses introduced: First Hypothesis: An increase in the QUALITY OF INCOME, results in a change in the sensitivity of next year CAPITAL EXPENSES to current year income. Second Hypothesis: An increase in the QUALITY OF INCOME, results in a change in the sensitivity of next year CAPITAL EXPENSES to the accrual portion of the current year income. Method of Research: Post event inquiry researches have been used in this study (using historical information). Moreover, since the relationship and correlation between variables have been examined using regression equations, research has been classified as a correlative type (Azar & Momeni, 2005). The relationship between the QUALITY OF INCOME, accounting income and its components (cash and accrual) with next year CAPITAL EXPENSES, were analyzed using the following regression:Invest i, t+1=a+b0. Qi, t+b1. AQi, t. Qi, t+b2. CFOi, t+1+b3. AQi, t. CFOi, t+1+b4. ROAi, t+b5. ROAi, t. AQi, t+b6. AQi, t+e i, t+1 Next year CAPITAL EXPENSES (Invest i, t+1) is the dependent variable in the research that has been extracted using the following ratio:Invest i, t+1=DAi, t+1/Ai,tSince, one of the information sources of managers in investment decision makings, is the market (information relating to share prices) and Tobin’Q (Qi, t) is considered one of the criteria in investment decision makings based on market price, it has been utilized as one of the control variable in this research and has been determined according to the equation below: Tobin's Q=Common Shares (Book Value – Market Value) +Book Value of total Assets/Book Value of Assets The other control variable of the research, is future operational cash flows (CFOi, t+1), due to its effects on investment decisions. Information relating to this variable has been extracted from the statement of cash flows. The QUALITY OF INCOME is the independent variable in this research and the criteria considered for it has been the quality of all ACCRUAL ITEMS of the capital working capital computed using the following regression equation (Dechow and Dichev, 2002; Mc. Nichols, 2002): TCAi, t=a+b1CFOi, t-1+b2. CFOi, t+b3CFOi, t+1+b4 (D Salesi, t – D Ari, t) +b5PPE i, t+e i, t TCAi, t is the sum of all ACCRUAL ITEMS in the working capital and has been computed as follows:TCAi, t=DCAi, t - DCLi, t – DCASHi, t+D STDEBTi, t / Average Book Value of All Assets During Years t, t-1 Accounting income (ROAi, t), is a representative of ACCOUNTING INFORMATION and is used by managers in investment decision makings. It is the result of dividing net income to total assets. To measure the accrual (ACCRi, t) and cash section (CFOi, t), of income, the relationship between net income, operational cash flows and ACCRUAL ITEMS were utilized. The accrual section was net income subsequent to operational cash flow deductions divided by the book value of the sum of all assets (Sloan, 1996). Results of Tests: Initially tests relating to the sensitivity of future CAPITAL EXPENSES to current year accounting income, future cash flows from operations and Tobin’Q were made and resulted in the following regression equation (Chen, 2005):Invest i, t+1 =a +b0. Q i, t +b 1. CFO i, t+1 +b 2. ROA i, t +e i, t+1 To examine the significance of all resulting coefficients, the t-test was used. Since the significance for each of the coefficients was less than 0.05, coefficients are significant and a relationship exists between the dependent and each of the independent variables. Regression running in tests involving the first hypothesis is as follows (Chen, 2005):Invest i, t+1 =a +b 0. Q i, t +b 1. AQ i, t. Q i, t +b 2. CFO i, t+1 +b 3. AQ i, t. CFO i, t+1 +b 4. ROA i, t +b 5. AQ i, t. ROA i, t +b 6. AQ i, t +e i, t+1 The coefficients relating to CFOi, t-1, CFOi, t+1 and (DSales i, t – DAR i, t) has been positive and negative for CFO i, t and PPE i, t througout the last five years, which conforms to expectations and results obtained in previous researches performed on the QUALITY OF INCOME. Results of the tests confirm the first hypothesis. Regression running for tests relating to the second hypothesis is as follows (same source):Invest i, t+1 =a +b 0. Q i, t +b 1. AQ i, t. Q i, t +b 2. CFO i, t+1 +b 3. AQ i, t. CFO i, t+1 +b 4. CFO i, t +b 5. AQ i, t. CFO i, t +b 6. ACCR i, t +b 7. AQ i, t. ACCR i, t +b 8. AQ i, t +e i, t+1 The significance of the coefficients has been examined using t-tests. Results indicate the acceptance of the second hypothesis. Results of the tests confirm the second hypothesis. Conclusion: In this research, the sensitivity of CAPITAL EXPENSES to ACCOUNTING INFORMATION and its relationship with the QUALITY OF INCOME has been examined. The QUALITY OF INCOME refers to the ability of the accounting income to precisely reflect the economic income and to be informative about the latter (Chen, 2005). Results of the research reflected that the QUALITY OF INCOME has positive influences over the sensitivity of future CAPITAL EXPENSES to current accounting income, sensitivity of future CAPITAL EXPENSES to future cash flows and Tobin’Q and as the QUALITY OF INCOME increases, the sensitivity of future CAPITAL EXPENSES to current accounting income increases as well. Moreover the QUALITY OF INCOME positively affects the sensitivity of future CAPITAL EXPENSES to the accrual portion of current year income, sensitivity of future CAPITAL EXPENSES to Tobin’Q and future cash flows from operations. The effects were more evident in the sensitivity of future CAPITAL EXPENSES to the accrual portion of income as compared to the cash portion. With the increase in the QUALITY OF INCOME, the sensitivity of future CAPITAL EXPENSES to the accrual portion of the current year income would increase as well.

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APA: Copy

MOJTAHEDZADEH, V., & AHMADI, FATEMEH. (2009). EARNING QUALITY ACCOUNTING INFORMATION AND CAPITAL EXPENDITURE. JOURNAL OF ACCOUNTING ADVANCES (JAA) (JOURNAL OF SOCIAL SCIENCES AND HUMANITIES), 1(1 (57/3)), 147-170. SID. https://sid.ir/paper/160430/en

Vancouver: Copy

MOJTAHEDZADEH V., AHMADI FATEMEH. EARNING QUALITY ACCOUNTING INFORMATION AND CAPITAL EXPENDITURE. JOURNAL OF ACCOUNTING ADVANCES (JAA) (JOURNAL OF SOCIAL SCIENCES AND HUMANITIES)[Internet]. 2009;1(1 (57/3)):147-170. Available from: https://sid.ir/paper/160430/en

IEEE: Copy

V. MOJTAHEDZADEH, and FATEMEH AHMADI, “EARNING QUALITY ACCOUNTING INFORMATION AND CAPITAL EXPENDITURE,” JOURNAL OF ACCOUNTING ADVANCES (JAA) (JOURNAL OF SOCIAL SCIENCES AND HUMANITIES), vol. 1, no. 1 (57/3), pp. 147–170, 2009, [Online]. Available: https://sid.ir/paper/160430/en

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