The Effect of Financial Reporting Quality (FRQ) on Investors' Sentiments

Abstract

Purpose – Financial reporting quality (FRQ) to reduce information asymmetry between investors is considered a distinctive feature of accounting information. In this study, the reduction of discretionary accruals in receiving net profit, which indicates higher-quality accounting information, is investigated. Design/methodology/approach – On the other hand, investors' sentiments due to their sensitivity to receiving accounting quality information with different degrees cause different reactions in the capital market. Investors' sentiments increase their risk in investing due to their uncontrollability. The study is conducted to reduce the sentimental decisions of investors due to the publication of FRQ. For this purpose, 109 companies listed on Tehran Stock Exchange from 2015 to 2021 were selected as a sample by screening method. Findings – The results indicate that the positive sentimental response of investors is reduced by increasing FRQ. Moreover, in companies with a higher market-to-book ratio (MB), increasing FRQ negatively affects the sentimental response of investors. Originality/value – According to the authors in the field of investor behavioral tendencies, most studies have discussed the effects of investor behavioral tendencies on stock returns, and no study has been found that examines how the quality of corporate financial statements can affect investors' emotional response and their attitude towards investment is influential.

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