Probability of Loss Reversal in Tehran Stock Exchange (Iranian evidence)

Investors of loss firms face abandonment decision based on their assessment of the likelihood of loss firms becoming profitable in future periods (i.e. loss reversal, Joos and Plesko, 2005). 72 companies from the companies listed in Tehran Stock Exchange during the 10 year period between 2002 to 2011 were reviewed. This research examines factors useful for predicting future loss reversal in the Iranian market. Specifically, the research focused on loss firms’ investment activities and the degree of accounting conservatism in addition to factors examined in the previous literature (Joos and Plesko, 2005; Dhaliwal et al., 2012). The result shows that variable measuring the activities of earlier investment stage are negatively associated with future loss reversal, while investment related to the close-to-production stage has positive impact. Accounting conservatism, as a persistent feature of financial reporting, is positively associated with future loss reversal. These results have implications for loss firm valuation.