A Model to Predict Financial Performance of Companies Using Corporate Governance and Conservatism Mechanisms

Most of the researches conducted in the area of predicting financial performance of the companies and bankruptcy in particular, have anticipated and/or compared merely the predictive power of the models for which financial ratios and company size have been used. However, this study aims mainly to investigate the effectiveness level of corporate governance and conservatism mechanisms in order to contribute to the predictive power of financial disclosure and accordingly, financial performance of the companies. The statistical population of the research includes the companies listed in Tehran Stock Exchange (TSE) out of which 90 companies (45 ones with poor performance and 45 ones with strong performance) were tested placing necessary limitations. Multiple Discriminant Analysis (MDA) technique has been used to establish the difference between poor and strong companies. A classification model including variables of company size, conservatism and corporate governance along with data on financial ratios (31 ratios) based on data in 2011 are compiled and financial performance in 2012 is predicted. The results of the study indicate that adding variables including corporate governance and conservatism will improve prediction accuracy of the financial performance and increase the classification accuracy of the model.

Financial Performance Prediction, Bankruptcy, Duality of CEO’s Duty, Institutional Investors, Financial Ratios, Company Size