Investigating asymmetric ratcheting effect on budgeted earnings in Tehran Stock Exchange

Abstract

Asymmetric ratcheting effect occurs when an unfavorable (favorable) budget variance causes in increase (decrease) in next period’s budget. The current study aims to investigate the existence of this effect on budgeted earning in Tehran stock exchange. We assume that the forecasted earning, which the firms listed in TSE are obligated to disclose, is the reflection of internal budget of the firm and the determined performance. By this disclosure, firms give their controlling instrument to capital market. Statistical sample includes 325 firms listed on TSE during 1386 to 1392. The results reveal that deviation from budgeted earning has a significant effect on the next period’s budget and unfavorable deviation effect is more than the favorable one.

Keywords

• budgeted earnings per share
• budget variance
• forecasted earnings per share
• ratcheting effect