The Interactive Effect of lawsuits and Investor Sentiment on Accounting Conservatism
Quarterly Journal of Securities Exchange

Quarterly Journal of Securities Exchange

The Interactive Effect of lawsuits and Investor Sentiment on Accounting Conservatism

Document Type : Original Article

Authors
masoud taherinia 1
Mohsen Rashidi 1
zahra mansouri 2
1 Assistant Professor of Accounting, Faculty of Economics and Administrative Sciences, Lorestan University, Khorramabad, Iran.
2 Master of Accounting Student, Faculty of Economics and Administrative Sciences, Lorestan University, Khorramabad, Iran.
10.22034/jse.2021.11333.1524
Abstract
Objective: Inappropriate response of executives to investor sentiment can lead to litigation and misallocation of funds, for this reason, companies set up conservative accounting in response to investor sentiment. This paper investigates the association between investor sentiment and accounting conservatism.

Methods: For this purpose, the data of 119 companies listed in Tehran Stock Exchange for the period of 2008 to 2017 were extracted and combined data regression model was used to test the research hypotheses.

Results: The results show that managers identify economic losses in a timely manner during periods with high investor sentiment. In addition, the relationship between sentiment and conservatism is stronger for companies whose values tend to be high. We also find that the relationship between sentiment and conservatism is higher for companies with higher litigation risk.

Conclusion: Overall, our results suggest that companies report earnings more conservatively in response to higher investor sentiment in order to mitigate potential litigation costs. These findings have implications for regulators and standard setters who have deemphasized accounting conservatism in recent years.
Keywords
"Accounting Conservatism"
"Investor Sentiment"
"Litigation Risk"
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Quarterly Journal of Securities Exchange
Volume 14, Issue 55
Autumn 2021
Pages 138-159