Examining the Simultaneous Relationship Between the Level of Forward-Looking Information Disclosure and the Profitability and Value of Companies in Annual Reports Using Simultaneous Equations
Keywords:
Forward-looking information disclosure, profitability, firm value, simultaneous equations, annual reportsAbstract
Objective: The purpose of this study was to investigate the bidirectional relationship between forward-looking information disclosure and both profitability and firm value in the annual reports of companies listed on the Tehran Stock Exchange from 2013 to 2023.
Methodology: This applied, descriptive, post-event study analyzed data from 178 firms selected through systematic elimination from all listed companies on the Tehran Stock Exchange. The level of forward-looking information disclosure was measured using content analysis of board activity reports, management discussion and analysis (MD&A), and financial statement notes. Hypotheses were tested using a system of simultaneous equations and two-stage least squares (2SLS) estimation with Excel and EViews software.
Findings: The inferential results demonstrated a significant positive and reciprocal relationship between forward-looking disclosure and profitability, measured by return on sales (ROS). Similarly, the findings confirmed a two-way and significant relationship between forward-looking disclosure and firm value, measured by Tobin’s Q ratio. Higher levels of forward-looking disclosure were associated with enhanced profitability and firm valuation, while more profitable and higher-valued companies tended to disclose more forward-looking information.
Conclusion: The study highlights the crucial role of forward-looking information disclosure in improving corporate transparency, investor confidence, and overall firm value. It emphasizes the mutual reinforcement between disclosure quality and financial performance, offering empirical evidence for policymakers and investors to enhance disclosure standards and corporate communication practices.
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