Document Type : Research Article
Authors
1 Department of Accounting, Khomein Branch, Islamic Azad University, Khomein, Iran
2 Department of Management, Economics and Accounting, Payame Noor University, Tehran, Iran.
3 Department of Accounting, Arak Branch, Islamic Azad University, Arak, Iran
Abstract
This paper introduces a predictive model for stock mispricing by examining the financial and governance factors that influence it. The model utilizes panel data from 133 companies listed on the Tehran Stock Exchange, selected through systematic elimination, during the years 2013 to 2022. It compares the predictive capabilities of these factors and evaluates the learning and predictive power of linear and nonlinear models using CART, LASSO, and PINSVR algorithms, which are considered artificial intelligence models in the fields of data mining and pattern recognition. The results indicate a significant difference in the error rates between linear and nonlinear models in predicting stock mispricing, suggesting that linear models, especially in times of high volatility, are less effective. Additionally, based on the Mean Absolute Error (MAE), the prediction of stock mispricing using corporate governance metrics generally indicates lower accuracy compared to financial metrics, even in nonlinear algorithms.
Keywords
[1] M. Abdollahzadeh, A. Baagherzadeh Hushmandi, and P. Nabati, Improving the accuracy of
financial time series prediction using nonlinear exponential autoregressive models, Journal
of Mathematics and Modeling in Finance, 4(1) (2024), 159–173.
[2] F. Ahmadi Farsani and A. Allahyari, Experimental study of the effectiveness of auditor
conservatism in preventing incorrect stock pricing, Accounting Advances, 15(2) (2023), 1–
28.
[3] J. C. Aiyabei, Effect of Financial Statement Information on Idiosyncratic Volatility of Stock
Returns among Listed Firms in Kenya, Doctoral dissertation, JKUAT-COHRED, 2021.
[4] W. M. Al-ahdal, M. H. Alsamhi, M. I. Tabash, and N. H. S. Farhan, The Impact
of Corporate Governance on Financial Performance of Indian and GCC Listed Firms:
An Empirical Investigation, Research in International Business and Finance, 51 (2020),
10.1016/j.ribaf.2019.101083.
[5] E. Alpaydin, Introduction to Machine Learning, the MIT Press, 2010, pp. 584.
[6] M. Alzahrani and R. P. Rao, Managerial behavior and the link between stock mispricing and
corporate investments: Evidence from market-to-book ratio decomposition, The Financial
Review, 49(1) (2014), 89–116.
[7] E. D. Baker, T. J. Boulton, M. V. Braga-Alves, and M. R. Morey, ESG government risk and
international IPO underpricing, Journal of Corporate Finance, 67 (2021), 101913.
[8] T. Baoa, M. Hennequinb, C. Hommesb, and D. Massaro, Coordination on bubbles in largegroup asset pricing experiments, Journal of Economic Dynamics and Control, 13(3) (2019),
115–137.
[9] P. G. Berger and E. Ofek, Diversifications Effect on Firm Value, Journal of Finance Economics, 37(1) (1995), 39–65.
[10] A. Bleck and X. Liu, Market Transparency and the Accounting Regime, Journal of Accounting
Research, 45(2) (2007), 229–256.
[11] H. Darvish and B. Bani Mahd, Ranking the usefulness of management system indicators in
line with the stakeholders’ theory, Management accounting and auditing knowledge, 10(39)
(2021), 187–199.
[12] P. M. Dechow, A. P. Hutton, and R. G. Sloan, An empirical assessment of the residual
income valuation model, Journal of Accounting and Economics, 26(1–3) (1999), 1–34.
[13] C. Deegan and J. Unerman, Financial Accounting Theory: European Edition, McGraw-Hill,
Maidenhead, Berkshire, 2006.
[14] J. A. S. De Souza, The linguistic complexities of narrative accounting disclosure on financial statements: An analysis based on readability characteristics, Research in International
Business and Finance, 48 (2019), 59–74.
[15] E. F. Fama and M. C. Jensen, Separation of Ownership and Control, Journal of Law and
Economics, 26 (1983), 301–325.
[16] N. Izadinia and A. Rasayan, The relationship between some supervisory tools of company
management and economic and financial performance evaluation criteria, Journal of Accounting Knowledge, 1(1) (2011), 53–72.
[17] M. C. Jensen and W. H. Meckling, Theory of the firm: Managerial behavior, agency costs,
and ownership structure, Journal of Financial Economics, 3(4) (1976), 305–360.
[18] L. Jin and S. Myers, R2 around the World: New Theory and New Tests, Journal of Financial
Economics, 79(2) (2006), 257–292.
[19] P. M. Healy and K. G. Palepu, Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature, Journal of Accounting and
Economics, 31(1) (2001), 405–440.
[20] A. P. Hutton, A. J. Marcus, and H. Tehranian, Opaque Financial Reports, R2, and Crash
Risk, Journal of Financial Economics, 94(1) (2009), 67–86.
[21] A. Karimi, R. Darabi, M. Pourfakharan, and H. Moghadam, Prediction of information quality
rating with the approach of factor analysis and artificial intelligence, Financial accounting
and audit research, 14(54) (2022), 101–139.
[22] S. Khalili and A. Safai Qadiklai, Evaluation of financial performance of active companies in
Tehran Stock Exchange, Research Journal of Executive Management, 7(14) (2014), 53–71.
[23] A. A. Khosrovinejad and M. Shabani, Evaluation of linear and non-linear models in predicting stock price index in Tehran Stock Exchange, Financial Economics (Financial Economics
and Development), 8(27) (2013), 51–64.
[24] J. B. Kim and L. Zhang, Financial reporting opacity and expected crash risk: Evidence from
implied volatility smirks, Contemporary Accounting Research, 31(3) (2014), 851–875.
[25] M. Laleh Majin, H. Zalqi, M. Bayat, and A. Sobhani, The effect of government ownership
on the performance of companies listed on the Tehran Stock Exchange, Financial accounting
and auditing research, 9(36) (2016), 151–170.
[26] Y. Li, Y. Kannan, S. Rau, and S. Yang, Real earnings management, corporate governance
and stock price crash risk: evidence from China, China Accounting & Finance Review, 24(2)
(2022), 172–198.
[27] A. Mohammadi, S. Amjadian, and B. Parvizi, Evaluation of financial performance using
interpretive structural model methods and the best and worst selection model, Experimental
Accounting Research, 12(2) (2022), 111–130.
[28] V. Nanda and M. P. Narayanan, Disentangling Value: Financing Needs, Firm Scope, and
Divestitures, Journal of Financial Intermediation, 8(3) (1999), 174–204.
[29] C. Pantzalis and J. C. Park, Agency Costs and the Underlying Causes of Mispricing, 2008,
https://ssrn.com/abstract=1085934.
[30] Z. Pourahmadi, D. Farid, and H. Mirzaei, A novel financial trading system based on reinforcement learning and technical analysis applied on the Tehran securities exchange market,
Journal of Mathematics and Modeling in Finance, 3(1) (2023), 99–118.
[31] L. Quy Duong, The value and growth effect in the Vietnamese stock market: a mispricing
explanation, Review of Behavioral Finance, 1(5) (2023), 100–119.
[32] A. Rahmanian Koushakki and A. Safar, The impact of investors’ divergent opinions on
the incorrect pricing of stocks with regard to the role of financial information quality and
information asymmetry in the Iranian capital market, Accounting Advances, 15(1) (2023),
147–174.
[33] S. M. Razavi Khosrowshahi, R. Hassanzadeh brothers, and M. Zainali, The effect of informational, operational and management complexity components of the company on incorrect
stock pricing, Financial Research, 24(3) (2022), 431–452.
[34] M. Rhodes-Kropf, D. T. Robinson, and S. Viswanathan, Valuation Waves and Merger Activity: The empirical Evidence, Journal of Financial Economics, 77(3) (2005), 561–603.
[35] M. Robnik-ikonja and I. Kononenko, An adaptation of Relief for attribute estimation in
regression, Proceedings of the Fourteenth International Conference on Machine Learning
(ICML97), 1997, 296–304.
[36] M. Sadeghi, H. Panahian, M. Safari Graili, M. Arabzadeh, and R. Saedi, Presenting a mathematical model for measuring corporate governance and investigating its consequences on the
risk of falling stock prices of companies, Financial knowledge of securities analysis, 14(52)
(2021), 105–123.
[37] F. Shen, Q. Guo, H. Liang, and Z. Liu, Responses in divergence of opinion to earnings
announcements: evidence from American depository receipts, International Journal of Managerial Finance, 19(2) (2022), 385–420.
[38] M. Shojaei and A. Abdul Baghi Attabadi, Anatomical analysis of noise transactions and
pricing error, Journal of Judgment and Decision Making in Accounting, 2(6) (2023), 43–74.
[39] J. H. Stock and M. W. Watson, A comparison of linear and nonlinear univariate models
for forecasting macroeconomic time series, NBER Working Papers from National Bureau of
Economic Research, 1998, https://EconPapers.repec.org/RePEc:nbr:nberwo:6607.
[40] A. Tamoradi, Z. Morsaliarzanagh, Z. Rezaei, and E. Abbasi, The effect of audit committee
financial expertise on relationship between companies irresponsibility and stock price crash
risk, Journal of Mathematics and Modeling in Finance, 3(2) (2023), 111–128.
[41] R. Tibshirani, Regression shrinkage and selection via the lasso, Journal of the Royal Statistical Society: Series B (Methodological), 58(1) (1996), 267–288.
[42] S. H. Vaqfi and A. Ashkoh, Investigating the effect of information asymmetry on stock
mispricing with an emphasis on the role of the company’s political connection, Scientific
Research Journal of Accounting Advances of Shiraz University, 13(2) (2021), 387–419.
[43] R. Verma and P. Verma, Investor sentiments and pricing errors, Review of Behavioral Finance, 13(4) (2021), 450–462.
[44] R. A. Walkling and R. O. Edmister, Determinants of Tender offer Premium, Financial
Analysts Journal, 1985, 27–36, https://ssrn.com/abstract=917880.
[45] X. Xiong, Y. Meng, N. L. Joseph, and D. Shen, Stock mispricing, hard-to-value stocks and
the influence of internet stock message boards, International Review of Financial Analysis,
72(C) (2020), 2087–2099.
[46] Z. M. Yang, X. Y. Hua, Y. H. Shao, and Y. F. Ye, A novel parametric-insensitive nonparallel
support vector machine for regression, Neurocomputing, 171 (2016), 649–663.
[47] Z. Yang, K. C. Ho, X. Shen, and L. Shi, Disclosure Quality Rankings and Stock MisvaluationEvidence from Chinese Stock Market, Emerging Markets Finance and Trade, 56(14)
(2020), 3468–3489.
[48] J. Yu, L. Tuo, and D. Wu, Industry peer firms’ earnings quality and IPO underpricing,
Journal of Corporate Accounting & Finance, 30(1) (2019), 36–62.
[49] M. H. Zare, H. Ansari Samani, and M. Aminian, The effect of the quality of financial information on the mispricing of shares in the Tehran Stock Exchange, Review of Iran’s Economic
Issues, 9(2) (2022), 103–129.
[50] H. Zhang, M. Wang, and J. Jiang, Investor protection and stock crash risk, Pacific Basin
Finance Journal, 43 (2017), 256–266.
[51] B. Zhu and F. Niu, Investor sentiment, Accounting Information and Stock Price: Evidence
from China, Pacific-Basin Finance Journal, 38 (2016), 125–134.
financial time series prediction using nonlinear exponential autoregressive models, Journal
of Mathematics and Modeling in Finance, 4(1) (2024), 159–173.
[2] F. Ahmadi Farsani and A. Allahyari, Experimental study of the effectiveness of auditor
conservatism in preventing incorrect stock pricing, Accounting Advances, 15(2) (2023), 1–
28.
[3] J. C. Aiyabei, Effect of Financial Statement Information on Idiosyncratic Volatility of Stock
Returns among Listed Firms in Kenya, Doctoral dissertation, JKUAT-COHRED, 2021.
[4] W. M. Al-ahdal, M. H. Alsamhi, M. I. Tabash, and N. H. S. Farhan, The Impact
of Corporate Governance on Financial Performance of Indian and GCC Listed Firms:
An Empirical Investigation, Research in International Business and Finance, 51 (2020),
10.1016/j.ribaf.2019.101083.
[5] E. Alpaydin, Introduction to Machine Learning, the MIT Press, 2010, pp. 584.
[6] M. Alzahrani and R. P. Rao, Managerial behavior and the link between stock mispricing and
corporate investments: Evidence from market-to-book ratio decomposition, The Financial
Review, 49(1) (2014), 89–116.
[7] E. D. Baker, T. J. Boulton, M. V. Braga-Alves, and M. R. Morey, ESG government risk and
international IPO underpricing, Journal of Corporate Finance, 67 (2021), 101913.
[8] T. Baoa, M. Hennequinb, C. Hommesb, and D. Massaro, Coordination on bubbles in largegroup asset pricing experiments, Journal of Economic Dynamics and Control, 13(3) (2019),
115–137.
[9] P. G. Berger and E. Ofek, Diversifications Effect on Firm Value, Journal of Finance Economics, 37(1) (1995), 39–65.
[10] A. Bleck and X. Liu, Market Transparency and the Accounting Regime, Journal of Accounting
Research, 45(2) (2007), 229–256.
[11] H. Darvish and B. Bani Mahd, Ranking the usefulness of management system indicators in
line with the stakeholders’ theory, Management accounting and auditing knowledge, 10(39)
(2021), 187–199.
[12] P. M. Dechow, A. P. Hutton, and R. G. Sloan, An empirical assessment of the residual
income valuation model, Journal of Accounting and Economics, 26(1–3) (1999), 1–34.
[13] C. Deegan and J. Unerman, Financial Accounting Theory: European Edition, McGraw-Hill,
Maidenhead, Berkshire, 2006.
[14] J. A. S. De Souza, The linguistic complexities of narrative accounting disclosure on financial statements: An analysis based on readability characteristics, Research in International
Business and Finance, 48 (2019), 59–74.
[15] E. F. Fama and M. C. Jensen, Separation of Ownership and Control, Journal of Law and
Economics, 26 (1983), 301–325.
[16] N. Izadinia and A. Rasayan, The relationship between some supervisory tools of company
management and economic and financial performance evaluation criteria, Journal of Accounting Knowledge, 1(1) (2011), 53–72.
[17] M. C. Jensen and W. H. Meckling, Theory of the firm: Managerial behavior, agency costs,
and ownership structure, Journal of Financial Economics, 3(4) (1976), 305–360.
[18] L. Jin and S. Myers, R2 around the World: New Theory and New Tests, Journal of Financial
Economics, 79(2) (2006), 257–292.
[19] P. M. Healy and K. G. Palepu, Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature, Journal of Accounting and
Economics, 31(1) (2001), 405–440.
[20] A. P. Hutton, A. J. Marcus, and H. Tehranian, Opaque Financial Reports, R2, and Crash
Risk, Journal of Financial Economics, 94(1) (2009), 67–86.
[21] A. Karimi, R. Darabi, M. Pourfakharan, and H. Moghadam, Prediction of information quality
rating with the approach of factor analysis and artificial intelligence, Financial accounting
and audit research, 14(54) (2022), 101–139.
[22] S. Khalili and A. Safai Qadiklai, Evaluation of financial performance of active companies in
Tehran Stock Exchange, Research Journal of Executive Management, 7(14) (2014), 53–71.
[23] A. A. Khosrovinejad and M. Shabani, Evaluation of linear and non-linear models in predicting stock price index in Tehran Stock Exchange, Financial Economics (Financial Economics
and Development), 8(27) (2013), 51–64.
[24] J. B. Kim and L. Zhang, Financial reporting opacity and expected crash risk: Evidence from
implied volatility smirks, Contemporary Accounting Research, 31(3) (2014), 851–875.
[25] M. Laleh Majin, H. Zalqi, M. Bayat, and A. Sobhani, The effect of government ownership
on the performance of companies listed on the Tehran Stock Exchange, Financial accounting
and auditing research, 9(36) (2016), 151–170.
[26] Y. Li, Y. Kannan, S. Rau, and S. Yang, Real earnings management, corporate governance
and stock price crash risk: evidence from China, China Accounting & Finance Review, 24(2)
(2022), 172–198.
[27] A. Mohammadi, S. Amjadian, and B. Parvizi, Evaluation of financial performance using
interpretive structural model methods and the best and worst selection model, Experimental
Accounting Research, 12(2) (2022), 111–130.
[28] V. Nanda and M. P. Narayanan, Disentangling Value: Financing Needs, Firm Scope, and
Divestitures, Journal of Financial Intermediation, 8(3) (1999), 174–204.
[29] C. Pantzalis and J. C. Park, Agency Costs and the Underlying Causes of Mispricing, 2008,
https://ssrn.com/abstract=1085934.
[30] Z. Pourahmadi, D. Farid, and H. Mirzaei, A novel financial trading system based on reinforcement learning and technical analysis applied on the Tehran securities exchange market,
Journal of Mathematics and Modeling in Finance, 3(1) (2023), 99–118.
[31] L. Quy Duong, The value and growth effect in the Vietnamese stock market: a mispricing
explanation, Review of Behavioral Finance, 1(5) (2023), 100–119.
[32] A. Rahmanian Koushakki and A. Safar, The impact of investors’ divergent opinions on
the incorrect pricing of stocks with regard to the role of financial information quality and
information asymmetry in the Iranian capital market, Accounting Advances, 15(1) (2023),
147–174.
[33] S. M. Razavi Khosrowshahi, R. Hassanzadeh brothers, and M. Zainali, The effect of informational, operational and management complexity components of the company on incorrect
stock pricing, Financial Research, 24(3) (2022), 431–452.
[34] M. Rhodes-Kropf, D. T. Robinson, and S. Viswanathan, Valuation Waves and Merger Activity: The empirical Evidence, Journal of Financial Economics, 77(3) (2005), 561–603.
[35] M. Robnik-ikonja and I. Kononenko, An adaptation of Relief for attribute estimation in
regression, Proceedings of the Fourteenth International Conference on Machine Learning
(ICML97), 1997, 296–304.
[36] M. Sadeghi, H. Panahian, M. Safari Graili, M. Arabzadeh, and R. Saedi, Presenting a mathematical model for measuring corporate governance and investigating its consequences on the
risk of falling stock prices of companies, Financial knowledge of securities analysis, 14(52)
(2021), 105–123.
[37] F. Shen, Q. Guo, H. Liang, and Z. Liu, Responses in divergence of opinion to earnings
announcements: evidence from American depository receipts, International Journal of Managerial Finance, 19(2) (2022), 385–420.
[38] M. Shojaei and A. Abdul Baghi Attabadi, Anatomical analysis of noise transactions and
pricing error, Journal of Judgment and Decision Making in Accounting, 2(6) (2023), 43–74.
[39] J. H. Stock and M. W. Watson, A comparison of linear and nonlinear univariate models
for forecasting macroeconomic time series, NBER Working Papers from National Bureau of
Economic Research, 1998, https://EconPapers.repec.org/RePEc:nbr:nberwo:6607.
[40] A. Tamoradi, Z. Morsaliarzanagh, Z. Rezaei, and E. Abbasi, The effect of audit committee
financial expertise on relationship between companies irresponsibility and stock price crash
risk, Journal of Mathematics and Modeling in Finance, 3(2) (2023), 111–128.
[41] R. Tibshirani, Regression shrinkage and selection via the lasso, Journal of the Royal Statistical Society: Series B (Methodological), 58(1) (1996), 267–288.
[42] S. H. Vaqfi and A. Ashkoh, Investigating the effect of information asymmetry on stock
mispricing with an emphasis on the role of the company’s political connection, Scientific
Research Journal of Accounting Advances of Shiraz University, 13(2) (2021), 387–419.
[43] R. Verma and P. Verma, Investor sentiments and pricing errors, Review of Behavioral Finance, 13(4) (2021), 450–462.
[44] R. A. Walkling and R. O. Edmister, Determinants of Tender offer Premium, Financial
Analysts Journal, 1985, 27–36, https://ssrn.com/abstract=917880.
[45] X. Xiong, Y. Meng, N. L. Joseph, and D. Shen, Stock mispricing, hard-to-value stocks and
the influence of internet stock message boards, International Review of Financial Analysis,
72(C) (2020), 2087–2099.
[46] Z. M. Yang, X. Y. Hua, Y. H. Shao, and Y. F. Ye, A novel parametric-insensitive nonparallel
support vector machine for regression, Neurocomputing, 171 (2016), 649–663.
[47] Z. Yang, K. C. Ho, X. Shen, and L. Shi, Disclosure Quality Rankings and Stock MisvaluationEvidence from Chinese Stock Market, Emerging Markets Finance and Trade, 56(14)
(2020), 3468–3489.
[48] J. Yu, L. Tuo, and D. Wu, Industry peer firms’ earnings quality and IPO underpricing,
Journal of Corporate Accounting & Finance, 30(1) (2019), 36–62.
[49] M. H. Zare, H. Ansari Samani, and M. Aminian, The effect of the quality of financial information on the mispricing of shares in the Tehran Stock Exchange, Review of Iran’s Economic
Issues, 9(2) (2022), 103–129.
[50] H. Zhang, M. Wang, and J. Jiang, Investor protection and stock crash risk, Pacific Basin
Finance Journal, 43 (2017), 256–266.
[51] B. Zhu and F. Niu, Investor sentiment, Accounting Information and Stock Price: Evidence
from China, Pacific-Basin Finance Journal, 38 (2016), 125–134.
)