The Effect of Political Information Uncertainty on Accounting Conservatism: Evidence from the Tehran Stock Exchange

Abstract

Objective: This study aimed to examine the effect of political information uncertainty on accounting conservatism and determine the moderating role of firm size in this relationship among companies listed on the Tehran Stock Exchange.

Methodology: This applied quantitative study employed a panel-data design. The statistical population consisted of non-financial companies listed on the Tehran Stock Exchange from 2011 to 2023, from which 114 eligible firms were selected using purposive sampling. Accounting conservatism, measured using the C-Score, was considered the dependent variable, while exchange-rate volatility was employed as a proxy for political information uncertainty. Firm size, financial leverage, sales growth, market-to-book ratio, and earnings volatility were incorporated as control variables. To examine the moderating role of firm size, an interaction term between firm size and exchange-rate volatility was included in the model. The F-Limer and Hausman tests were employed to determine the appropriate panel-data specification, and the hypotheses were tested using fixed-effects panel regression.

Findings: The fixed-effects regression results indicated that political information uncertainty, proxied by exchange-rate volatility, had a positive and statistically significant effect on accounting conservatism (β=0.189, p=0.012), thereby supporting the first hypothesis. Furthermore, the interaction between firm size and political information uncertainty was positive and statistically significant (β=0.143, p=0.003), confirming the moderating role of firm size. Accordingly, the positive effect of political information uncertainty on accounting conservatism became stronger as firm size increased, providing support for the second hypothesis.

Conclusion: The findings indicate that accounting conservatism serves as a precautionary mechanism under heightened political uncertainty by facilitating risk management and reducing information asymmetry associated with environmental instability. Moreover, firms’ conservative reporting responses vary according to structural characteristics, with larger firms displaying a stronger tendency to adopt conservative accounting practices when exposed to greater political information uncertainty.