The Asymmetric Impact of Market Risk and Turbulence on Financial Reporting Conservatism: The Moderating Role of Macroeconomic Fluctuations in an Emerging Economy

Document Type : Research Paper

Authors

1 Department of Accounting and Economics, University of Hormozgan, Bandar Abbas, Iran.

2 Department of Business Administration, University of Hormozgan, Bandar Abbas, Iran.

Abstract

This study identifies a theoretical puzzle: while agency theory predicts that all forms of uncertainty increase accounting conservatism as a precautionary buffer, we find that market turbulence reduces it. This paradoxical reversal cannot be explained by standard risk-aversion frameworks. Using a balanced panel of 154 firms listed on the Tehran Stock Exchange over 2015-2024 (1,540 firm-year observations), we employ FGLS as our primary estimator, complemented by System GMM to address endogeneity. Our findings reveal a fundamental asymmetry consistent with our proposed Conditional Dominance Framework: market risk has a positive and significant effect on conservatism, supporting the agency-theoretic view of conservatism as a rational response to mitigate agency costs. Conversely, market turbulence exerts a negative and significant impact, consistent with Prospect Theory's prediction that under ambiguity and loss-domain conditions, managers become risk-seeking and abandon prudent reporting. Critically, this behavioral reversal is not constant but is activated and amplified by adverse macroeconomic conditions—inflation and exchange rate depreciation—which act as cognitive regime-switches. Economic growth and higher real interest rates weaken these relationships. The primary contribution is demonstrating that financial reporting conservatism is not merely a strategic response but a fragile defense mechanism that systematically collapses under extreme macro-volatility, challenging the implicit assumption that conservatism always increases with uncertainty. Our findings offer critical insights for managers, investors, and policymakers navigating volatile emerging economies.
 

Keywords

Iranian Journal of Economic Studies
Volume 15, Issue 1 - Serial Number 29
Issue in Progress
2026
Pages 85-117

Files

History

  • Receive Date: 16 February 2026
  • Revise Date: 03 May 2026
  • Accept Date: 03 May 2026

Share

How to cite

Statistics