Dynamic Shock Effects of Investment Flow on Earnings Quality of Selected Companies Listed on the Tehran Stock Exchange with Emphasis on Synchronization of Financial and Business Cycles
Keywords:
Investment flow, Earnings quality, corporate governance, financial cycle, Business cycleAbstract
Objective: This study aims to investigate the dynamic shock effects of investment flow on the earnings quality of selected companies listed on the Tehran Stock Exchange, with emphasis on the synchronization of financial and business cycles and the moderating role of corporate governance.
Methodology: This applied, descriptive-analytical study examines 106 selected firms listed on the Tehran Stock Exchange over the period 2011–2024. After screening procedures, panel data were analyzed using the Panel Vector Autoregression (Panel VAR) framework to assess dynamic interactions among investment flow (proxied by accrual working capital), earnings quality (measured through discretionary accruals based on the Modified Jones Model), financial cycle indicators (bank facilities and price-based stock returns), business cycle (output gap extracted via Hodrick–Prescott filter), and corporate governance (constructed using Principal Component Analysis from nine governance attributes). Control variables included firm size, leverage, return on assets, and sales growth. Stationarity was examined using Levin–Lin–Chu unit root tests, and panel cointegration was confirmed via Kao and Johansen–Juselius tests. Optimal lag length was determined based on information criteria, and an Error Correction Model (ECM) and impulse response analysis were employed to evaluate short- and long-term dynamics.
Findings: Results indicate that investment flow dynamics exert a positive and statistically significant effect on earnings quality at the 95% confidence level. Financial cycle indicators and corporate governance index also demonstrate positive and significant impacts on earnings quality, whereas the business cycle variable exhibits a significant negative effect. Leverage negatively affects earnings quality, while profitability, firm size, and sales growth show positive associations. Cointegration results confirm the existence of long-term equilibrium relationships among variables, and the error correction term indicates adjustment toward long-run equilibrium following short-term disequilibria. Impulse response analysis reveals that shocks to explanatory variables initially produce noticeable effects on earnings quality, which gradually diminish over time.
Conclusion: The findings suggest that effective management of investment flows, strengthened corporate governance mechanisms, and synchronization of financial and business cycles play a crucial role in enhancing earnings quality and investment efficiency.
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Copyright (c) 2025 Shabnam Raeisi, Khashayar Seyed Shokri, Shahriar Nessabian (Author)
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