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ISSN : 1598-7248 (Print)
ISSN : 2234-6473 (Online)
Industrial Engineering & Management Systems Vol.19 No.4 pp.908-915
DOI : https://doi.org/10.7232/iems.2020.19.4.908

The Effect of Business Diversity on the Relation between Profit Sustainability, Real Earnings Management and Commercial Credit in Companies of Securities and Exchange Organization of Iraq

Salah Chyad Kadhim, Hussein Falah Hasan*, Hudaa Nadhim Khalbas
Business Administration Department, Kut University College, AL Kut, Wasit, Iraq
Department of Accounting, Dijlah University College, Massafi st Doura, 10021, Baghdad, Iraq
*Corresponding Author, E-mail: hussien.falah@duc.edu.iq
October 14, 2020 November 30, 2020 December 4, 2020

ABSTRACT


The main purpose of this research is to analyze the effect of business diversity on the relation between profit sustainability, real earnings management and commercial credit in companies of Securities and Exchange Organization of Iraq. In this research, dependent variable is business credit which is calculated through dividing trade payable accounts of the company on the total asset (Petersen and Rajan, 1997; Giannetti et al., 2011) the independent variables are profit sustainability and real earnings management; in order to calculate profit sustainability the Kormendi and Lipemodel has been utilized while for calculating real earnings management the model that already has been used. The research data has been gathered by using a sample made up of 35 companies during 2011-2016. The research hypotheses were analyzed by hybrid data in SATA14 application. The results indicate that the modular effect of business diversity on the relation of profit sustainability and business credit is positive and meaningful, and the modular effect of business credit on the relation between real profit management and business credit is not meaningful.



초록


    1. INTRODUCTION

    Taking into account the change in consumers’ taste and also the transformations that occur in competing and technological situations, a company cannot and should not rely exclusively on its current products since customers are willing to have new and more advanced goods (Akhbari and Taqavi, 2007). Development of new products is one of the most important factors creating the basis of success. This fact holds true specially does more for companies based on modern technologies because having a correct first idea is so much important for these companies and assures the ground and predisposition of its development in future. The issue of success in presenting new products to target markets is of high importance for managers and owners of these businesses. Considering competitive situations surrounding economic institutions, development of new products is the only way to survive their profitability. Big companies play an important role in countries’ economies and are usually of a high variety in business. Attentions are focused on stating strategy for business entities rather than stating strategy for entities holding only one business. From Matususaka (2001) point of view variety is the process of seeking for businesses appropriate to entities’ abilities (Matususaka, 2001, 409). When the competition gets intense and the risk rate goes up, this strategy is used in order to decrease the competition risk and pressure and the probability of being let down; it means that instead of investing on one product or becoming single-product, they start presenting products in several different products. Diversification is done in two concentric and nonconcentric ways that are the basis of presenting new related products and services to customers (concentric) or new products and unrelated services to customers (nonconcentric) (Ali-Ahmadi, 2010, 67). Diversification is a part of four main growth strategies presented by Ansoff product-market matrix. Ansoff has pointed out that diversification strategy is excluded from three other strategies. The first three strategies seek for technical and financial sources and goods in order to use the main product line, while diversification of a company usually requires acquisition of new skills, techniques, sources and facilities. Diversification is the riskiest strategy amongst the four strategies presented in Ansoff matrix and requires accuracy of investment in this strategy. Entering an unknown market with non-familiar offered products means the lack of experience in new and essential skills and techniques. Therefore, the company has stepped into a great distrust. The definition of diversification depends on subjective interpretation of new market or new product that should reflect the customers’ comprehension instead of those of the managers; in fact, products lead to creation or instigation of new markets, and new markets improve the innovation of the product (Daadbeh and Baqerabadi, 2012, 91).

    2. LITERATURE REVIEW

    Researches of Apostu (2010) have been generally conducted on European countries and has studied the role of diversification strategies in various financial items considering the previous economic studies. Controlling the size of the company, profitability, growth, tangible assets and operational risk, he concluded that geographical and commercial diversification doesn’t have any effect on the structure of the capital.

    Erdorf et al. (2012) proceeded to analyze the influence of corporate diversification on the company’s value. While at the beginning of this century, the dominant attitude amongst researches and workingmen was that corporate diversification leads to depreciation of company’s value, several researches doubted about the company’s value. In their research, they came to this conclusion that corporate diversification doesn’t lead to depreciation of company’s value by itself, and this effect is different among particular industrial complexes, financial situations and administrative structures.

    Dust and Dadbeh (2014) analyzes the company’s diversification, information asymmetry and company’s performance. Their studies indicate that factors such as increase of unsteadiness and disturbance in industry, managers’ focus on increasing stock value and growth and emergence of new ideas about the company’s management have been reasons for make this company concentrated again. They assessed a strategic business environment of companies of Securities and Exchange Organization of Tehran in a sample of 47 great companies in 2008- 2012. The results have shown that the diversification of great companies has affected the information asymmetry, and also the companies’ diversifications have effects on their performance.

    Chen et al. (2017) attempted to analyze the quality of accounting and commercial credit to see whether companies with the lowest level of accounting quality can use more of commercial credit as a financing resource. Due to the information asymmetry of those companies, providers are more likely to provide the commercial credit for customers possessing a lower quality of accounting. The results conform to this anticipation which means there is a negative, meaningful relation between companies’ quality of accounting.

    Li et al. (2018) analyzed the financial report and commercial credit in 30 countries in 2000-2014. The main purpose of the research is the effect of applying IFRS on commercial credit. Data show that companies located in countries which apply IFRS collect more commercial credit from their providers. Furthermore, the quality of financial reporting has an important role in facilitating the financing.

    Masahiro (2019) conducted a research entitled " the effect of corporate governance on the relation between the quality of accounting and commercial credit: evidences from Japan. The research was conducted since 201 t 2014. The results indicate that commercial credit increases by increasing the quality of accounting. Also, the presence of benefit between providers and customers weakens the relation between the quality of accounting and commercial credit.

    Huang et al. (2019) conducted a research entitled ”the commercial credit and companies’ sustainable growth in China” through the data from financial statements of 208989 companies since 2003 until 2017. The results of this research indicated that there is a positive, meaningful relation between commercial credit and sustainable growth of the companies, and also that the relation between commercial credit and sustainable growth of companies while having less access to financing is greater.

    Moqarrabi (2012) has studied the effect of corporate diversification on company’s performance using the ratio of Tobin’s Q. The results show that corporate diversification doesn’t affect the company’s performance and that there is no meaningful relation between geographical diversification and company’s performance.

    Almzade (2013) has assessed the effect of corporate diversification on cash holding in companies accepted in Securities and Exchange Organization of Tehran. The results state that the influence of corporate and commercial diversification on cash holding is negative and meaningful, and geographical diversification has no relation with cash holding.

    Aflatuni and Nemati (2018) analyzed the role of financial reporting’s quality and disclosure’s quality in increasing the commercial credit. The sample of the research included 146 companies accepted in Securities and Exchange Organization of Tehran during 1383-1395. The acquired results indicate that by increasing the quality of financial reporting and disclosure, the commercial credit rate increases.

    3. METHODOLOGY

    Aim wise, this research is practical, and is done by correlation method. The library method was employed to collect theoretical foundations. In order to do so, the data related to literature review has been gathered through using library resources, magazines, books and essays available in universities’ libraries through retrospective study.

    3.1 Theoretical Foundations

    In the last twentieth century, because of expert companies having become susceptible to rapid and unexpected changes, the environment (diversity) became an essential foundation for development and survival of the companies; the increasing importance of diversity in explanation of occurred changes in the shape and the profile of organizations and industries has led to the expansion of a wide range of researches in various social sciences. A diversity is the extent to which institutes are busy in different business activities simultaneously (Tehrani and Hadi, 2006).

    Oxford dictionary 2009 defines the word diversity as follows: (about entities) means the expansion or change in the spectrum of products, domain of activities or such, in order to decrease the dependence of the entity to a particular market or like that. The definition of diversification depends on the subjective interpretation about the new market or the new product that must reflect the customers’ understanding of that market rather than those of managers. Actually, products lead to creation or instigation of new markets, and new markets improve the innovation of the product (Daadbeh and Baqerabadi, 2012).

    3.2 Commercial Diversification

    In commercial diversification, the company possesses diversity in activities, and is active in two or several parts of the market, and each commercial part is a separable part of the business entity that presents a related product or service or a group of related products or of services, and contains risk and interest different than other parts of the business entity. Factors below must be considered in mind while determining about related products and services:

    • a) The nature of products or services

    • b) The nature of productive processes

    • c) Customers’ type or class for products or services

    • d) Methods of product distribution or service provision

    • e) The nature of relevant principles; for instance, banking and insurance regulations (Iran’s accounting standards, no. 25)

    On the other hand, commercial credit is a short term, financing resource for small and mid-sized companies (Seifert et al., 2013). In regard to law, each commercial credit deal is a mutual obligatory agreement which allows the client to receive the merchandise and services before paying for them to the provider, and to register the commercial credit as a current liability in the balance sheet. From the provider point of view, the given commercial credit is investment in receivable accounts and documents, and appears as a property in balance sheet (Izadinia and Taheri, 2015). According to Biais and Gollier (1997) for companies facing financial limitations, using commercial credit is easier compared to other resources of financing. However, since the clients must bear the implied cost of this sort of financing, commercial credit is only a choice and if there is no better and cheaper alternative, it can be beneficial (Deloof and Van Overfelt, 2008). Although Petersen and Rajan (1997) find commercial credit and bank loans as alternative financial resources, Burkart and Ellingsen (2004) consider these resources as complements (and not alternatives) of each other. Various factors affect the rate of commercial credit. Biais and Gollier (1997) believe that by decreasing the information asymmetry between client and clerk, client can receive more of commercial credit from clerk. Increasing the quality of financial reporting Biddle and Hilary (2006) and increasing the disclosure quality (Brown and Hllingsen, 2007) are amongst the methods of decreasing information asymmetry; therefore, one of the methods of increasing the commercial credit is decreasing the asymmetry between client and customer. Clients, by increasing the quality of financial reporting, can provide more information about the financial situation and performance to clerks and decrease the current information asymmetry and through this, lead to increase in received credit from clerks.

    Regarding the preceding explanations, it seems necessary to study the effect of business diversity on the relation between profit sustainability, real earnings management and commercial credit. Therefore, following hypotheses are formulated in order to study the mentioned relations:

    • The first hypothesis: business diversities of companies affect the relation between profit sustainability and commercial credit.

    • The second hypothesis: business diversities of companies affect the relation between real earnings management and commercial credit.

    3.3 The Method and Tools of Data Acquisition

    In order to acquire demanded data, financial statements from assessed companies and the information given by Tadbirepardaz Securities and Exchange Organization were collected, and then by summing up and required calculations have become ready to be analyzed in Excel.

    3.3.1 Method of Data Analysis

    The final analysis will be done by Sata14 and other authentic statistics applications if necessary.

    3.3.2 Overview or Conceptual Model

    The dependent variable of the research is commercial credit that is calculated by dividing the accounts payable on the total assets (Petersen and Rajan, 1997;Giannetti et al., 2011).

    The dependent variable of the research is profit sustainability and real earnings management. In order to measure the profit sustainability, the model will be uses, but for real earnings management, will be used and is as follows:

    Kormendi and Lipe (1987) model for measuring the profit sustainability:

    That in this model:

    Earn it Total Asset it- 1 = α + δ* Earn it- 1 Total Asset it- 1 + V i t
    (1)

    • EARNi,t : operating income of the company i in the year t

    • Total asset: the whole assets

    If the explanatory variable coefficient of the profit sustainability’s model (δ1) approximates one or is greater than one, indicates the high sustainability of profit; and if it approximates zero or is lesser than zero, expresses instability of profit.

    3.3.3 The Model of Roychowdhury(2006) for Measuring Real Earnings Management

    ( C F O i t T A i t 1 ) = β 0 + β 1 ( 1 T A i t 1 ) + β 1 ( S i t T A i t 1 ) + β 1 ( S i t T A i t 1 ) + ε i t
    (2)

    That in this model:

    • CFO: net operating cash flow

    • S: company’s sale

    • TA: total asset

    3.4 Test of Hypotheses

    The first hypothesis test:

    AP it 0 1 PS it 2 DGOODS it 3 PS*DGOODS it 4 SIZE it 5 SALEGROWTN i,t 6 AGE i,t 7 AGE 2 i,t 8 ROA i,t 9 AR i,t 10 TOBINSQ i,t 11 CASH i,t 12 DEBT i,t 13 MARKETSHARE i,t i,t

    • AP: is the commercial credit that is calculated by dividing commercial accounts payable of the company on the total asset.

    • PS: profit sustainability

    • DGOODSit (commercial diversification): is a divalent variable and its quantity is one if the company has commercial diversification, and if not, it will be considered to be zero.

    • SIZEit (size of the company): the logarithm of company’s total asset

    • SALEGROWTHit (sale growth): the sale of the current year subtracted from the sale of the previous year, divided on the sale of the previous year.

    • AGEit (age of the company): the natural logarithm of the number of the years company has been established.

    • AGE2it (the total of squares of company’s age (the natural logarithm of the number of the years company has been established).

    • ROAit (return of assets): the earnings before deduction of the taxes, devided on total assets of the company.

    • ARit (the ratio of accounts receivable): the total of accounts receivable divided on the total assets of the company.

    • TOBINSQit (the ratio of Tobin’s Q): the value of the market of shareholders’ equity plus book value of company’s liabilities, divided on the book value of company’s total assets.

    • CASHit (the ratio of cash): the total of cash and its equivalent, divided on the company’s total assets.

    • DEBTit (the ratio of debt): the total of debts divided on company’s total assets.

    • MARKETSHAREit (market share): is company’s sale divided on the total of sale of industry in fiscal year.

    The second hypothesis test:

    AP it 0 1 E M it 2 DGOODS it 3 EM*DGOODS it 4 SIZE it 5 SALEGROWTN i,t 6 AGE i,t 7 AGE 2 i,t 8 ROA i,t 9 AR i,t 10 TOBINSQ i,t 11 CASH i,t 12 DEBT i,t 13 MARKETSHARE i,t i,t

    • EM: real earnings management

    4. RESULTS AND DISCUSSION

    The population of the research includes the companies accepted in Securities and Exchange Organization of Iraq in the period since 2011 until 2016 (1390-1395).

    4.1 Sampling Method

    In this research in order to acquire an available statistical population, all of the companies of the statistical population which possess the features below, have been selected as the available statistical population:

    • •Companies must have been accepted in Securities and Exchange Organization of Iraq before 2011, and haven’t exited until the end of 2016.

    • •Companies must not have changed fiscal year during the studied period.

    • •Financial data of companies in the studied period must be available.

    • •They must not be financial institutions (banks) and financial intermediary companies.

    The companies accepted in stock exchange were 122 that after applying mentioned features, 35 companies were analyzed.

    4.3 Research Data

    According to the results of the Table 1 it seems that average of the commercial credit is 0.298. The profit sustainability’s average is 0.005. These results show that the sample Iraqi companies have profitability continuity on average but the quantity is low. Results also indicate that the average of real earnings management is 0.008. The averages of the size of the company and the sale are respectively 9.703 and 0.259. The average age of available companies are approximately 31 and the averages of natural logarithm of company’s age and the total of its squares are respectively 3.358 and 11.419. The averages of the return of the assets, the ratio of accounts receivable and the ratio of Tobin’s Q are -0.012, 0.263 and 4.153. The average of the ratio of cash is 0.163 and those of the ratio of debt and the market share are 0.395 and 0.113 .In what follows, the results of normality test indicates that a low number of variables don’t possess a normal distribution. But, because of a not so much difference in the average and the median, and since the number of observations (210 observations) are more than 30, it can be stated on the basis of the central limit theorem that variables follow a pretty normal distribution (Greene, 2011).

    The correlation coefficient between two variables measures the degree of linearly dependence between those two. The correlation coefficients of the research’s main variables are presented in the table below:

    According to the results of Table 3, the amount of the coefficient of determination states that dependent and control variables explain about 85% of the independent variable’s changes. Meaningfulness of Wald statistics (689.21) state the general meaningfulness of the model related to the first hypothesis of the research. Data indicate that commercial diversification has a meaningful, positive effect on the companies’ commercial credit in this model. Furthermore, the results of the first hypothesis test show that the effect of commercial diversification (PS*DGOODS) on the relation between the profit sustainability and the commercial credit is positive and meaningful. Therefore, the first hypothesis is confirmed. In other words, the commercial diversification has a positive, meaningful effect on the relation between the profit sustainability and the commercial credit. Other results show that in this model, size, return of assets, the ratio of accounts receivable and the ratio of Tobin’s Q and the ratio of debt has a positive, meaningful relation with commercial credit. But, the relation between other control variables and the commercial credit is not meaningful.

    Regarding the data of Table 4, the amount of the coefficient of determination indicates that dependent and control variables explain approximately 85% of the independent variable’s changes. The meaningfulness of Wald statistic (715.49) shows the general meaningfulness of the model related to the second hypothesis of the research. Results prove that in this model, the commercial diversification has a positive, meaningful effect on the commercial credit. Besides, the data of the second hypothesis of the research show that the effect of the commercial diversification (EM*DGOODS) on the relation between the real earnings management and the commercial credit is not meaningful. Therefore, the second hypothesis of the research is not accepted. The results also indicate that in this model, size, return of assets, the ratio of accounts receivable and the ratio of Tobin’s Q and the ratio of debt has a positive meaningful relation with the commercial credit. But, there seems no meaningful relation between other control variables and the commercial credit.

    5. CONCLUSION

    5.1 The First Hypothesis

    The test of the effect of companies’ commercial credit on the relation between the profit sustainability and the commercial credit has been done. The results of the first hypothesis show that the commercial diversification has a positive, meaningful effect on companies’ commercial credit. Furthermore, the results of the research’s first hypothesis indicate that the effect of commercial diversification (PS*DGOODS) on the relation between the profit sustainability and the commercial credit is positive and meaningful. So, the first hypothesis is confirmed. In other words, the commercial diversification has a positive, meaningful effect on the relation between the profit sustainability and the commercial credit. Other results show that in this model, size, return of assets, the ratio of accounts receivable and the ratio of Tobin’s Q and the ratio of debt has a positive meaningful relation with the commercial credit. But, according to the acquired results which reject this hypothesis the relation between other control variables and the commercial credit is not meaningful.

    5.2 The Second Hypothesis

    In this hypothesis, the testing of the effect of the commercial credit on the relation between the real earnings management and the commercial credit was conducted. The results of the second hypothesis prove that the commercial diversification has a positive, meaningful effect on the commercial credit. Besides, the data of the second hypothesis indicate that the effect of the commercial diversification (EM*DGOODS) on the relation between the real earnings management and the commercial credit is not meaningful. Therefore, the second hypothesis of the research is not confirmed. Results also show that in this model, size, return of assets, the ratio of accounts receivable and the ratio of Tobin’s Q and the ratio of debt has a positive meaningful relation with the commercial credit. But, there seems no meaningful relation between other control variables and the commercial credit. Now, the relation between other control variables with the commercial credit is not meaningful.

    Figure

    Table

    Descriptive statistics of the current research

    Pearson’s coefficient of correlation between the main variables of the research

    The results of the first hypothesis test

    The results of the second hypothesis test

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