Accounting and Auditing Studies

Accounting and Auditing Studies

The Impact of Auditor's Conservatism on the Relationship between the Readability of Financial Reporting and Incorrect Stock Pricing

Document Type : Original Article

Authors
Vahab Rostami 1
Hamed Kargar 2
Abbas Rostami 3
1 Assistant Prof., Faculty of Management and Accounting, Payame Noor University, Tehran, Iran
2 MSc. in Accounting,Faculty of Management and Accounting, Payame Noor University, Tehran, Iran
3 Ph.D. Student in Accounting, Faculty of Management and Accounting, Zanjan Branch, Islamic Azad University, Zanjan, Iran
10.22034/iaas.2025.236384
Abstract
Purpose: The present study seeks to trace the effect of auditor conservatism on the relationship between the readability of financial information and incorrect pricing of companies' shares.
Method: In this regard, a sample consisting of 127 companies listed in the Tehran Stock Exchange during the years 2012-2021 was selected and finally the research hypotheses were tested with the help of multiple linear regression and test based on panel data (since the data 2021 years were used in the calculations of incorrect stock pricing, finally 9 periods were used in the statistical tests). To measure stock mispricing the 5-factor model of Pantzalis and Park (2013) and to evaluate the readability of financial reporting the Fog index and finally to measure the auditor's conservatism the Chong et al. model (2003), which is an extension of Basu's conservatism model(1997) was used resistively.
Findings: It was observed that there is an inverse and significant relationship between the readability of financial reporting and mispricing of stocks, and the auditor's conservatism strengthens the relationship between the readability of financial reporting and incorrect stock pricing.
Conclusion: The current research provided useful evidence that by better using the readability of financial information, it is possible to reduce the incorrect pricing of shares, and the auditor community plays an important role in this regard. The capital market is the place of valuation of the company's shares due to the power of the company, and if the valuation is incorrect, the parties to the transaction will suffer. As the readability of financial statements improves, the amount of mispricing of stocks will decrease. Also, one of the factors to consider regarding the quality of financial information is the audit of financial statements. In fact, the purpose of financial reporting is to provide information that is useful for users to make decisions. To be useful, information must have a series of qualitative characteristics. Auditors are trusted by investors who handle financial statements for the benefit of the beneficiaries. Due to the inherent characteristics and risks in the auditing profession, auditors may be a bit more conservative in providing opinions and observe the accounting conservatism standards in order to be cautious between confirming good and bad news, which ultimately leads to their credit should not be damaged. When the readability of the financial report is balanced and the investor is able to understand it, and also the auditor uses some kind of conservatism in sending the financial statements, there will be stability in the performance of the investors and a kind of reduction of lack of there will be information asymmetry, which will ultimately reduce the incorrect pricing of stocks.
Keywords
Auditor's Conservatism, Financial Reporting Readability, Incorrect Stock Pricing
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Accounting and Auditing Studies
Volume 14, Issue 55
Autumn 2025
Pages 107-124