The Effects of Accruals on Financial Constraints in Tehran Stock Exchange

Abstract

Despite a large literature on discretionary accruals, how accruals impact corporate financial decisions is not well-understood. It is hypothesized that a financially constrained firm with valuable projects can use discretionary accruals to credibly signal positive prospects, enabling it to raise capital to make the investments. In today’s world, there are many companies that, in spite of encountering financial constraints,  have valuable projects. Considering this issue, they can mark their positive activities’ aspects to the market using arbitrary choices and therefore, increase their capital stock price in short-term. This research aims to study the effects of discretionary accruals on companies' financial constraints. So, 113 companies were studied during 2006 to 2012. This research includes six dependent variables that in each hypothesis, one of them are estimated and overall, the results are similar. We have examined a large panel of firms during 2006 to 2012 and found that financially constrained firms with good investment opportunities had significantly higher discretionary accruals prior to investment compared to their unconstrained counterparts. Constrained high-accrual firms have higher earnings-announcement returns than constrained low-accrual firms, obtain more equity and debt financing, and invest in projects that appear to improve performance. These results provide supporting evidence that the use of discretionary accruals can help constrained firms with valuable projects ease those constraints and increase firm value.