The Role of Earnings Quality in Estimating Credit Risk

Document Type : Research Paper

Authors

1 PhD Student in Accounting, Faculty of Humanities, Islamic Azad University, Neishabour Branch, Iran

2 Assistant Prof. Islamic Azad University of Sabzevar

3 Associate Prof. Islamic Azad University of neyshabour

Abstract

The purpose of this research is to compare the four indicators of earnings quality that use only accounting data in order to determine the quality of profit and determine their impact on the degree of credit risk of listed companies in Tehran Stock Exchange.
In so doing, the data related to 156 companies were gathered between 2008 and 2017. In keeping with, 20 financial indicators were used to determine the risk of credit and then their ranking by data envelopment analysis method. The significant relationship between the indices with the credit rating of each company was also tested. Likewise, four indicators of earnings quality including sustainability and predictability features, profit / cash relationship, accruals, and, finally, earnings response coefficient and adjusted earnings response coefficient were used. First, the relationship of the 20 financial ratios applied with the credit rating determined by the data envelopment analysis method was verified in the form of a regression model tested and validated by the model. Then, the significant relationship between the four indicators of earnings quality with the credit rating of each company was tested.
The results showed that companies with lower credit risk enjoyed higher earnings quality. Likewise, with a decrease in the quality of profit indicators, their credit risk will also increase. Based on the findings in the research, it can be concluded that there is a significant relationship between credit risk of listed companies in Tehran Stock Exchange and their main indicators of earnings quality. In this research, credit rating is the amount of credit risk calculated and ranked by data envelopment analysis method.
 

Keywords

References

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History

  • Receive Date: 30 November 2018
  • Revise Date: 04 August 2019
  • Accept Date: 16 September 2019

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