Indian Journal of Fundamental and Applied Life Sciences ISSN: 2231– 6345 (Online) An Open Access, Online International Journal Available at www.cibtech.org/sp.ed/jls/2015/01/jls.htm 2015 Vol.5 (S1), pp. 248-256/Azimi and Nahandi Research Article © Copyright 2014 | Centre for Info Bio Technology (CIBTech) 248 THE EFFECT OF CASH RESERVE ON CONDITIONAL CONSERVATISM ACCOUNTING OF COMPANIES WITH THE AGENCY COST OF FREE CASH FLOW *Marjan Azimi 1 and Younes Badavar Nahandi 2 1 Department of Accounting, University Lecturer of Mahdie Khoy Vocational 2 Department of Accounting, College of Management, Economics & Accounting, Tabriz Branch, Islamic Azad University, Tabriz, Iran *Author for Correspondence ABSTRACT Due to the development of stock corporations, many investors were appeared that have no direct role in their participation with managing units office. The outcome of this process was the ownership separation from management companies. The ownership separation was lead to agency issue. Indeed, agency theory proves that managers strive to maximize profits to hide bad news related to companies and report the good news, immediately. Due to the high cost of agencies, there is a risk that conservatism reduces in financial reporting and earning management phenomena is spread. This study is conducted to investigating the effect of cash reserve on conditional conservative of accounting firms that have agency costs of free cash flow in listed companies of Tehran Stock Exchange. For this purpose, by applying the condition survey, 92 companies were selected as an instance in 2006-2011 periods. The research method is a data analysis with the multiple regressions combination type using Eviews software. In the present study, the conservatism Basu index is used to measure the conditional conservatism and the interaction of free cash flow and growth opportunities are used to measure the agency costs. In this study, the agency costs are used as independent variables, conditional conservatism as the dependent variable, the cash reserve as damper variable and the market value ratio to office value. The results show that cash reserve don’t influence on conservative accounting companies that have agency flow costs of free cash. Keyword: Conditional Conservatism, Agency Costs, Cash Reserve INTRODUCTION From an economic perspective, by assuming the relational behavior, it is assumed that all of people are seeking to maximize their interests and managers are also no exception. Managers interested in maximizing personal benefits, social welfare and consolidate its position, and they can provide a good picture of financial position of business unit from shareholders and other stakeholders. But in some cases, increasing the manager's wealth is not in line with increasing other groups such as shareholders. This issue shows the lack of siding of manager's benefits and other stakeholders in the business unit. In the analysis of the created value for shareholders, the company's free cash flow is important. By identifying the appropriate growth opportunities, managers can invest the funds in positive direction and thus, they can increase the wealth of their shareholders. According to the theory of conflict benefits between managers and owners, some managers may be forced to invest free cash flow in the projects with negative net present value and they can supply some their personal benefits in short term. Jensen was the first person who analyzed mentioned problem in his famous theory. He considered the costs of free cash flow as costs that are invested in projects with negative net present value. From Jensen perspective, the managers of business unit with low free cash flow and low growth, manages profit to eliminate the less profits and losses arising investment in such projects and they supply their personal benefits in short term. To solve this problem, Jensen notes to indexes such debt index and distribution of free cash flows as dividend that can modify the above equation (Mehrani and Bagheri, 2008). Managers as a responsible for preparing the financial situation of company and by a greater awareness with respect to users of financial statement show appropriate image of business unit as a favorable unit. For example, by considering the costs of a period as an asset, they can reduce costs and increase profits