The Relationship of Stock Return with Earnings and Cash Flows before and after Financial Statement Restatements by the Companies Listed on the Tehran Stock Exchange

Abstract

In this research we study the relationship of stock return with earnings and operating cash flows before and after restatement of financial statements. For this purpose, the stock return index is used as dependent variable and earnings and operating cash flows as independent variables. The data used in this research has been collected from the financial statements of one hundred and twenty two companies listed on the Tehran Stock Exchange during 2008-2012. The results show that earnings and operating cash flows (before restatement of financial statements) are directly related to dependent variable although they become negatively related with stock return after financial statement restatements. The difference becomes more evident as regards earnings. We observe that before restatement, the investors use higher earnings index as a basis for decision making but we see a reduction in the explanatory power of this information after restatement.