Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
Effect of Conservatism and Level of Cash Holdings on
Reducing the Risk of Bankruptcy for the Petrochemical
Industry
Rezvan Torabi1
Profit, as the end result of accounting process, calculated and affected by accounting
procedures that choose Managing. Possibility of selecting accounting practices gives the
opportunity to management regarding recognition and measurement of costs and
revenues and makes a decision. Management has the incentive to employ nonconservative accounting practices and will stabilize corporate profit growth. This will be
lead to increase in shareholders expected of the Company in the coming years. In this
study examined the, presence of short-term and long-term relationship between each of
independent variables on the dependent variable VAR method is used and Eviews
software is used to process the data. Main variables, is conditional and unconditional
conservatism and bankruptcy risk. Based on the results of VAR and VECM models, two
conditional conservative and non-conditional conservative on bankruptcy risk index as
the dependent variable has a negative and significant impact and the impact of
bankruptcy risk on conditional conservatism and unconditional is positive and significant
and show that managers will be more conservative when the bankruptcy risk of last year
increase.
Keywords: Conservatism, Level of Cash holdings, risk of bankruptcy, firms listed in
Tehran Stock Exchange for the petrochemical industry.
1- Introduction
The most important accounting information is income statements and investors turn
their most attention to the net profit on the income statement as the last items are
concerned. Profit as the end result of the accounting process that has a much attention
of accounting information users is influenced by the choice of management accounting
practices can be calculated. The possibility of selecting accounting practices gives
management regarding recognition and measurement of revenues, expenses and
makes a decision. Management has the incentive to employ non-conservative
accounting practices, corporate profit growth will stabilize. This is led to increase in the
shareholders expected from the coming years of company (Watts, 2003, pp. 301-287).
In order to Reported earnings be able to evaluate the performance and profitability of a
company's ability to help users and Investors relying on dividend information, to
estimate their expected returns, information should be presented in a way that makes it
possible to evaluate the past performance and in the measure of profitability and profit
prediction can be effective, so besides the reported profit figure is important for
investors and on affect the decision making of them, qualitative properties of profit as an
aspect of profit information is under special consideration for investors (Francis et al,
2002, p 967).
Faculty member at the Islamic Azad University, Dehaghan Branch, Esfahan, Iran,
Email: torabi1975@gmail.com
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
In accounting, conservatism is a prominent feature of financial reporting that in the recent years
due to financial scandals have observed, more and more attention is placed. While most
accounting believed conservatism, but it has not provided a clear and comprehensive definition
and still remains unclear in this context. Despite the lack of a comprehensive definition of
conservatism in the accounting literature, two important features of conservatism is been studied.
First, the existence of bias in presented less than real of book value of the stock relative to its
market value (Feltham and Olson, 1995), Second tend to accelerate in the detect losses and
deferred profit is recognized (Basu, 1997). Conservatism or caution is one concepts of realism
and also is the limitations of accounting and financial reporting that can act as an agent for
preventing optimistic measure of managers. On the other hand, the preparation of the financial
statements that was too conservative will also not favorable, because they provide unrealistic
information and will result to distortion of quality, impartiality, reliability and comparability of
the financial statements. So the determination of the effects of practices of conditional and
unconditional conservatism accounting is essential in reducing the risk of bankruptcy.
Recent studies show that the market value of an additional dollar in the cash balance held less
than one dollar (Falkndr and Wan, 2006).In this regard, Li and Powell (2010) found evidence
that capital markets react to the level of cash holdings in the companies. They found that
companies that consistently have the extra cash, compared with companies that randomly and
periodically have faced this issue, have their shareholders achieve less efficiency. The results
with free cash flow hypothesis of Jensen (1986) in which it has been suggested that excess cash
flow has a negative impact on efficiency of investment decisions, is consistent (Lewis et al,
2011).
According to Jensen and investigators after his, as the additional cash flow increase in the
company, reduce marginal utility of it for business owners to create value, and may result in
additional cash resources manager can devote to expansion which is known as over-investment.
On the other hand, managers tend to hide bad news related to the company's performance and
potentially show the business situation favorable. In the companies with conservative reporting
environment, the opportunities and incentives of management to hide bad news is narrower and
therefore more likely to participate in this project with a negative net present value are timely
identified and set aside. This leads to low investment, which is the lack of investment and create
a free cash flow in new projects due to the conservative practices. Accordingly, it is expected
that accounting conservatism as a regulatory mechanism, increase the value of extra cash flow
and marginal utility for investors (Lewis et al, 2011).
According to the above can be expected that accounting conservatism (conditional and
unconditional) in three ways influence on the risk of bankruptcy. 1) The role of accounting
conservatism in raising level of cash holdings (such as precautionary reserves) makes the
company have appropriate funds and may face lower bankruptcy risk. 2) Conservatism due to
low profits and assets view and thereby limiting payments to capital providers and on the other
hand, with facilitate external financing of the company, reduce the risk of bankruptcy of
companies in crisis and delays its bankruptcy. 3) Accounting conservatism approach lead to
faster recognition of bad news and bad projects and thereby stop them and reduces the
probability of bankruptcy.
If accounting conservatism (conditional and non-conditional) influence on the risk of
bankruptcy, may be risk of bankruptcy be a factor for applying conservatism in the financial
reporting. In other words, we expect that companies that have more likely to bankruptcy in the
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
future; be applied to more conservatism levels that this conservatism due to demand and monitor
suppliers on the environment investment company reporting it. Therefore, the main purpose and
the present study is expressed as follows:
Does between conditional and unconditional conservatism accounting and cash flows with
bankruptcy risk, is a reciprocal relationship?
2 - Theoretical and research background
2-1 - Iran's conservatism standards
In our country, the audit committee, joined in the international accounting standards of Iran, in
the theoretical concepts of reporting, that is a translation of the statement of principles of
accounting standards board of England, recognizes conservatism with other words that is it
caution, and see it as a component of reliable quality features will be introduced. (Mojtahedzade,
2001).
Committee on theoretical concepts of financial reporting defined caution as “caution is used the
degree of care in the exercise of judgment to estimate that is required in the ambiguous situations
so that income or assets will not offer more than fact and costs or liabilities will not less than
fact”. At the following explains exerted caution should not be lead to the creation of hidden
reserves or reserves that are unnecessary or assets offer more than fact and liabilities and
expenses offer less than fact, because this is violation of neutrality and affect the reliability of
financial information. (Technical Committee on Corporate Audit, 2007).
Based on the above definition conservatism of uncertainty has grown. Whenever the accountants
in the valuation of assets, liabilities are facing with uncertainty (ambiguity) the problem of
conservatism is sumptuous. In other words, whenever the uncertainty is on the dominant
valuation, accountants prefer their false-positive items (assets and operating income and nonoperating income) expressed lower and about the item-negative bacteria (debt costs loss) express
more. Convention conservatism is pervasive enough that no standards venture could not to
ignore it. Even the Financial Accounting Standards Board (FASB) that is not included in the
hierarchy of accounting quality on the belief that conservatism accounting practice in the valley
is inevitable. Conservatism has always approved accounting standards framers and according to
the requirements of these standards has many practical applications, for example, can be outlined
as follows: applying the principle of least cost or net sales in the inventory valuation, not
recognizing goodwill and other intangible assets have been created within the business unit,
account R & D spending for the costs, identification and reporting of operational expenditure as
an expense and not an asset item (Mojtahedzade, 2001).
Accelerate in the recognition of bad news can influence on the motivation of management and
managers consider the future costs of claims in anticipation of their earnings. Earnings forecasts
by management can affect the value of the Company in the securities; in the meantime
conservatism cause managers to predict future earnings with more restrictions and could not
apply some of interests in its predictions.
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
2-4 - Definition of Bankruptcy
With the expansion of corporations as well as its associated problems arose. The most important
problem related to the issue that firms that investor wants to invest in, how much it is likely to
bankrupt, and leave the principal and interest of equity capital.
Table 1: Reasons for bankruptcy
Jona Apaie perspective
Internal causes
External causes
Reduce dividends
Development of
excessive credit
Accidents
The Company's subsidiaries
lockouts
Inefficient management.
Financing
Losses
Inadequate capital
Change in trade and
transport and
improvements in general
demand
overload underemployment
Seasons and stop operation
Infidelity and cheating
Competition
The resignation of senior
managers
Characteristics of the
economic system / swing
trading
Decline in stock prices
2-5 - Background of research
Foroughi and Abasi (2011) examined the relationship between conservatism and a number of
enterprise features, including size, ratio of market value to book value of equity, the degree of
financial leverage, life, cycle of specific investments and uncertainty in firm. Also asymmetric
behavior conservatism in identifying good and bad news (Profit and Loss) on the non-accrual
variables and asset efficiency ratio were investigated. The results indicate that between
conservatism and firm size, is a significant and negative correlation and between conservatism
associated with financial leverage and market value of equity to book value is positive and
significant correlation. Also, the correlation coefficient between conservatism and life is negative
and significant. The coefficient for the variable cycle of investment and firm-specific uncertainty
is positive and significant.
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
Fakhari, and Taghavi (2009), in their study were analyzed the effect of accruals quality on the
level of cash holdings in listed companies in the Tehran stock exchange. To this end, 150
companies of listed companies in the Tehran stock exchange selected and their financial data
from 2001 to 2007 is discussed. The evidence shows a negative and significant relationship
between the quality of financial reporting and cash equivalents and cash. So, pay attention to the
quality of financial reporting by the company, reducing financing costs due to excess cash
holdings and inefficient, is important. The results also show growth opportunities, cash flow and
cash holdings have a positive impact on cash balance and size, debt maturity and opportunity
costs are negatively associated with cash balance.
Edward Owen (2012) in their study examined the internal relation between accounting
conservatism and assumes continuing operations and earnings of useful information. Also impact
of bankruptcy of companies and useful information on good and bad news on the companies
surveyed and concluded that the bankruptcy has a negative relationship with the good news and
the bad news is no relationship. Findings measures undiscovered effects of accounting
conservatism on firm value.
In a survey by Louis (2011) was conducted to examine the relation between accounting
conservatism and the value of cash holdings with return the company and in the end concluded
that accounting conservatism has a positive effect on the relationship between cash holdings and
the company's future operating performance. However, evidence obtained from this study
indicate that accounting conservatism with optimum use of funds available to the company has a
connection and support the notion that accounting conservatism can be represented as a
substitute for external oversight and reduce agency costs.
Heater and Ramakryshnan (2010) during its investigation concluded that conservatism increased
precautionary cash balance and operating cash flow risk. This means that in the unsuitable
conditions are not investing cash flow and growth opportunities for the company to create in
good condition and reduce the risk of 'operating cash flow discount. Previous research shows that
conservatism can be reduce asymmetric information between stakeholders through the law
maximum loss and reduce the risk of discounted operating cash flows.
A study by Francis et al (2010) suggests that the equity market valuation from accruals is not
more than cash flows. The companies also exhibit higher levels of conservatism, the reactions of
differential returns to accruals are more. They found the features of a company like the absolute
amount of accruals, operating cycle length, the standard deviation of sales, profits and cash
flows, accruals and firm size can be used as a tool to assess the quality of earnings.
Gray et al (2010) in an article with title relationship between accounting conservatism and
bankruptcy risk explores the relation between accounting conservatism and bankruptcy risk. In
this research conservatism is divided into unconditional conservatism and conditional
conservatism. Results and analytical models show that the role of information and increase of
conservatism available cash flow to deal helps with the risk of bankruptcy. Research hypotheses
using correlation analysis and regression modeling have been tested. The results of this study
indicate that is an inverse relationship between unconditional conservatism and bankruptcy risk.
Also relationship between conditional conservatism and bankruptcy risk is also inversely. This
finding leads to prepare a behavioral role for conservative helping companies deal with their
commitments.
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
3 - Model of research and study variables
Research method is descriptive - causality. Descriptive because it describes the purpose or
conditions of phenomena is and for greater recognition of the current situation and causal
because this study relationships between variables can be estimated through regression. The
objective of this research considered from applied research. Applied research include research
that by using methods, tools and models is carried out to improve the current situation or
improving operational efficiency.
Model used in this study are as follows. It should be noted that according to the methodology
used in this research is VAR, the number of variables can be defined model that most notably
with respect to the subject matter of the study are as follows:
BR=F(Lev,RoA,STDRet,MV, Cach,dCach, Cu1,Cu2)
Where:
BR: Bankruptcy risk index as the dependent variable
Independent variables:
RoA: rate of return on assets
STDRet: standard deviation of returns as an indicator for return volatility
MV: firm size (log of assets)
Cach: Cash
dCach: Changes in Cash
Cu1, Cu2: conditional and unconditional conservatism.
Bankruptcy risk assessment practices
In this study for the measurement bankruptcy risk is used, Altman model (1968). Altman (1968)
through the analysis of multiple diagnoses and the five-over 22 financial ratios be selected 5
ratios as the best combination of predictors of bankruptcy. The reason for using this model is that
Altman bankruptcy model is frequently used in internal research and has a suitable predictive
power and for the economic conditions of Iran has been proven (Ghodrati and Manavi
Moghadam, 2009” Soleimani, 2010). Altman model is as follows (Soleimani, 2010):
Z = 0/999X1 + 0/ 6X2 + 3/3X3 +1/ 4X4 +1/ 2X5
Predictor variables (X) in the model were: sales to total assets, market value of equity to book
value of debt, earnings before interest and taxes to total assets, retained earnings to total assets
and the working capital to total assets. Altman after the test of the model found that success rate
is 95 percent (Soleimani, 2010). In the above model, z is considered as an indicator Altman
bankruptcy each year - the company is calculated separately. Whatever size of z is larger, the risk
of bankruptcy is lower. According to the hypothesis testing model, the risk of bankruptcy, the
value obtained for z In (-1) is multiplied.
Unconditional conservatism is somehow of conservatism which influenced by accounting
standards and legal requirements. To measure this variable, is used from the negative ratio of the
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
average total accruals before depreciation to total assets over the three-year average (Biddle,
2010). It is calculated according to equation (1) as follows.
Unconditional conservatism =
(1)
Accruals are calculated from difference between net income as operating cash flow plus
depreciation expense. Accruals growth is an indicator of the change in degree of unconditional
conservatism over a long period. In other words, if accruals increase in which case unconditional
conservatism decreases and vice versa. Therefore, to determine the direction of change
conservatism accruals in a negative number is multiplied.
Conditional conservatism caused by managers reporting procedures and asymmetric reactions
towards her unrealized profits and losses are recognized (Basu, 1997). For measuring of
conditional conservatism is used from negative towards non-operational accruals cumulated to
total assets average accumulated in the past three years. Because they believe (Zhang, 2008) the
bad news related to the company are reflected and stored on non-operational accruals. Nonoperating accruals method of calculation based on equation (2) as follows:
Non-operating accruals = Changes in accounts and trade notes receivable - total accruals +
change in trade accounts payable + Orders and prepaid expenses - inventory changes + changes
in save of staff termination benefits + changes in pre receipt
Changes in the above relationship are the difference between accounts of this year with last year.
Taking into increase or decrease in the account does not change the above equation.
This study aimed to assess the presence or absence of a relationship between each of the
independent variables on the dependent variable. To investigate these relationships VAR method
and for processing information and distill it Eviews software is used.
4 - Estimation Model
4.1 - Determination of the optimal lag
Table 3: Results of the determination of the optimal number of lags in model
Lag
LogL
LR
FPE
AIC
SC
HQ
0
0.0991
NA
2/27e+16
54/68604
54/98428
54/73651
8/95e+11*
42/71371*
46/59088*
43/36988*
55/17117*
0.0419
Source: Eviews software output
1
According to the results to determine the optimal lag, the number of optimal lags is equal to 1.
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
4-2 - Determining the cointegration vectors
Table (4) results of rank test and maximum eigenvalues
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
Trace
0.05
No. of CE(s)
Eigenvalue
Statistic
Critical
Value
Prob.**
None *
0/895734
115/1854
95/75366
0/0012
At most 1
0/845446
99/66505
83/81889
0/0487
At most 2
0/480823
24/45902
47/85613
0/9323
At most 3
0/248203
8/071276
29/79707
0/9967
At most 4
0/036720
0/939043
15/49471
0/9856
At most 5
0/000151
0/003764
3/841466
0/9499
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized
MaxEigen
0/05
No/ of CE(s)
Eigenvalue
Statistic
Critical
Value
Prob/**
None *
0/895734
56/52033
40/07757
0/0003
At most 1 *
0/745446
34/20603
33/87687
0/0457
At most 2
0/480823
16/38775
27/58434
0/6327
At most 3
0/248203
7/132233
21/13162
0/9485
At most 4
0/036720
0/935279
14/26460
0/9999
At most 5
0/000151
0/003764
3/841466
0/9499
Source: Eviews software output
Table (4) is observed due to the co-integration tests are the two vectors.
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
4.3 - explained and estimating the VAR model
Table (5) estimate the VAR model
Y(-1)
UU(-1)
UC(-1)
MV(-1)
ROA(-1)
CASH(-1)
DCASH(-1)
STD(-1)
C
Y
0.151028
(0.02348)
[ 6.43315]
-0.52561
(0.45155)
[-1.16401]
UU
0.005464
(0.00297)
[ 1.83945]
0.098936
(0.05714)
[ 1.73148]
UC
0.002123
(0.00362)
[ 0.58643]
0.152800
(0.06965)
[ 2.19399]
-0.765178
-0.0201
-0.12287
(0.36375)
(0.04603)
(0.05610)
[ -2.10356]
[-0.43673]
[-2.19005]
-0.024701
0.008868
0.007876
(0.03675)
(0.00465)
(0.00567)
[ -0.67206]
[ 1.90677]
[ 1.38939]
-12.7277
(0.46381)
[-27.4415]
-3.02308
(1.65549)
[-1.82609]
-0.48595
(0.05869)
[-8.27984]
-0.13867
(0.20948)
[-0.66196]
-0.17713
(0.07154)
[-2.47612]
-0.3397
(0.25533)
[-1.33042]
1.770612
0.526069
0.390067
(1.60529)
[ 1.10298]
0.096122
(0.03252)
[ 2.95581]
-0.88376
(0.45384)
[-1.94730]
(0.20313)
[ 2.58978]
0.001203
(0.00412)
[ 0.29244]
-0.04062
(0.05743)
[-0.70728]
(0.24759)
[ 1.57544]
0.002057
(0.00502)
[ 0.41011]
-0.0156
(0.07000)
[-0.22292]
Source: Eviews software output
Based on the research results, the effect of ROA on bankruptcy risk index as the dependent
variable is negative and significant which suggests that an increase in return on assets as a
profitability index, can reduce risk of companies and create optimism among stakeholders, can
reduced bankruptcy risk.
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
Based on the research results, the effect of the standard deviation of returns as an indicator of
return volatility on bankruptcy risk index as the dependent variable was significant and positive,
indicating that the increase in return volatility is one of the biggest causes of bankruptcy risk.
Fluctuations in returns are a measure of stock corporate risk and should be controlled.
Based on the research results, the effect of firm size (log of assets) on bankruptcy risk index as
the dependent variable was significant and negative, indicating that the increase in the assets of
the company can reduce the risk of bankruptcy. In other words, increasing the size of the
company creates credibility and reduces the probability of bankruptcy of the company.
Based on the research results, the effect of cash on bankruptcy risk index as the dependent
variable was significant and negative, indicating that the increase in corporate cash, reduce the
bankruptcy risk. In other words, raise cash of company creates optimism and flexibility to deal
with fluctuations in returns and thus reduce the probability of bankruptcy in companies.
Based on the research results, the effect of changes in cash on bankruptcy risk index as the
dependent variable was significant and positive, indicating that the increase in cash changes in
company, increases the bankruptcy risk. In other words, the increased volatility of cash now,
cause fluctuations in returns and thus increases the probability of bankruptcy of the company.
Consistent with research results
The effect of two variables conditional and unconditional conservatism on bankruptcy risk index
as the dependent variable was significant and negative, indicating that the increase in the
conditional and unconditional conservatism company reduces the bankruptcy risk. In other
words, increases in conditional and non-conditional conservatism company as a management
system, decreases return volatility and thus reduces the probability of bankruptcy of the
company.
Impact of bankruptcy risk on conditional and unconditional conservatism is positive and
significant, which suggests that the increased in bankruptcy risk of last year, led to company
executives will be more conservative.
4-4 - estimated vector error correction model (VECM)
The main reason for the error correction model is known is that related short-term fluctuations on
their long-run equilibrium values of the variables. In investigate the short term relation, is no
difference between the two estimation methods Engel - Granger and Johansen - Juselius.
The vector error correction model is used from long-term information with a combination of
short-term adjustment mechanism. In other words, short-term fluctuations and long-term value of
a variable that is relevant. In this model, the residual terms of the convergence equation is used
as a variable and its coefficients are considered as short-term adjustment coefficient. The value
of this coefficient is between minus one and zero and the relationship between short-term
fluctuations and long-term value of a variable (Shirinbaksh and Khansari, 2005).
Table (6) the estimated VECM model
Proceedings of 11th International Business and Social Science Research Conference
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Cointegrating
Eq:
Y(-1)
MV(-1)
UU(-1)
UC(-1)
CointEq1
1.000000
0.000000
-39.72183
(2.75874)
[ -14.3985]
-38.16858
(2.29347)
ROA(-1)
[-16.6423]
-21.48111
(1.92983)
CASH(-1)
STD(-1)
C
[ -11.1311]
-0.567985
(0.21599)
[ -2.07982]
1.502454
(0.22170)
[ 6.77704]
1.245100
Source: Eviews software output
The results of VECM and VAR indicate that the effect of two variables conditional and
unconditional conservatism on bankruptcy risk index as the dependent variable was negative and
significant and suggests that the increase in conditional and unconditional conservatism company
reduces the bankruptcy risk.
Table (7) the estimated VECM model
Cointegrating Eq:
CointEq1
CointEq2
UU(-1)
UC(-1)
Y(-1)
1.000000
0.000000
0.014398
(0.0071)
[ 2.17860]
0.238402
(0.07089)
[ 3.36295]
-0.709917
(1.54264)
0.000000
1.000000
0.041183
(0.0296)
[ 2.50245]
0.248103
(0.07208)
[ 3.44210]
-1.301603
(1.56850)
MV(-1)
ROA(-1)
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
CASH(-1)
STD(-1)
C
[-0.46020]
3.050884
(3.16557)
[ 0.96377]
-2.078283
(0.09832)
[-21.1381]
-2.584922
(0.87449)
[-2.95592]
[-0.82984]
3.160158
(3.21864)
[ 0.98183]
-2.123494
(0.09997)
[-21.2419]
-2.722735
(0.88915)
[-3.06218]
Source: Eviews software output
Model results of VECM, the same as VAR, indicating that the effect of bankruptcy risk on
conditional and unconditional conservatism is positive and significant and show the increased
risk bankruptcy of last year, company executives will be more conservative.
5 - Conclusions and Suggestions
Based on research results, the effect of ROA on bankruptcy risk index as the dependent variable
is negative and significant, indicating that an increase in return on assets as a profitability index,
can reduce risk of company and create optimism among stakeholders, reduced risk bankruptcy.
Based on research results, the effect of the standard deviation of returns as a return volatility
index indicator on bankruptcy risk as the dependent variable was significant and positive,
indicating that the increase returns volatility is one of the biggest causes bankruptcy risk.
Existence of fluctuations in stock returns is a measure of corporate risk and should be controlled.
Based on research results, the effect of firm size (log of assets) on bankruptcy risk index as the
dependent variable was significant and negative, indicating that the increase in the assets of the
company led to reduce of the bankruptcy risk. In other words, increasing the size of the company
creates credibility and reduces the probability of bankruptcy of the company. Based on research
results, cash on bankruptcy risk index as the dependent variable was significant and negative,
indicating that the increase in corporate cash reduces the bankruptcy risk. In other words, raise
cash of company creates optimism and flexibility to deal with fluctuations in returns and thus
reduce the probability of bankruptcy. Based on research results, cash changes on bankruptcy
risks index as the dependent variable was significant and positive, indicating that the increase in
cash changes in company which increases the bankruptcy risk. In other words, an increase in
volatility of cash, cause fluctuations in returns and thus increase the probability of bankruptcy of
the company. Based on the research results the effect of two variables, conditional and
unconditional conservatism on bankruptcy of risk index as the dependent variable was significant
and negative, indicating that the an increase in conditional conservatism and unconditional
reduces the bankruptcy risk. In other words, increases in conditional and non-conditional
conservatism of company as a management system reduce the volatility of returns and thereby
reduce the probability of bankruptcy of the company.
According to the research results can be offered the following suggestions:
Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
According to research results and significant negative effect of rate of return on assets, on
bankruptcy risk index as the dependent variable, policy proposals outlined in this section,
policies based on increasing profitability indicators such as the rate of return on assets to reduce
the risk of bankruptcy companies.
Based on the results of research and positive and significant effect of standard deviation of
returns as an indicator of returns volatility on bankruptcy risk index as the dependent variable,
financial and economic policy based on reducing the volatility of returns is one of the most
important means of reducing the risk of bankruptcy of the company.
According to research results and significant negative effect of firm size (log of assets) on
bankruptcy risk index as the dependent variable, increase the company's assets could be one of
the reduction risk policies.
According to research results and significant negative effect of cash on bankruptcy risk index as
the dependent variable, and significant positive effect of cash changes on bankruptcy risk, results
indicate that an increase in corporate cash, reduce the bankruptcy risk and important policy
recommendations based on the increase in the company's cash and cash change mitigation
companies.
Based on research results and significant negative effect of two conditional and unconditional
conservatism variables on bankruptcy risk index as the dependent variable, the most important
policy proposed in this study are increases the conditional and unconditional conservatism to
reduce the risk bankruptcy.
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