Abstract:

When investors form their expectation of the future profits of the corporation, they forecast the stability of the accruals less than the cash flow, and consequently the stock will be priced incorrectly. Disclosure of information would keep the analysts and investors informed and will increase the accuracy of their predictions. Thus Disclosure with higher quality contributes to the full comprehension of information about accruals and cash flow and it’s expected to have an impact on the earnings components mispricing. Investigation of the relationship between disclosure quality and incorrect pricing of accruals and cash flow is important because it highlights the role of quality of disclosure in helping the investors understand the correct accounting information related to prices; therefore a relationship is formed between disclosure quality and market performance. Thus it is expected that the stock price in firms with higher disclosure quality in comparison with firms with lower disclosure quality, would reflect the persistence of accruals (cash flow) with more accuracy. To investigate the purpose of this study, the information of about 82 firms listed in Iran’s stock exchange market during the years 2002 to 2010 were used. The application of multiple regression methods using panel data indicates that investors underestimate the persistence of accruals and overestimate the persistence of cash flow. This behavior of investors causes stock to be priced incorrectly. Therefore, incorrect pricing of earnings components is reduced in firms with higher disclosure quality

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