Examining the Impact of Digital Washing on Accounting Conservatism: The Moderating Role of Analyst Coverage, Investor Sentiment, and Executive Compensation

Document Type : Original Article

Authors

1 Department of Accounting and Management, Sari Branch, Sarovia Non-Profit University, Sari, Iran

2 assistant professor, Department of Accounting, Shahr-e Qods Branch, Islamic Azad, Shahr-e Qods. Iran

3 Department of Accounting and Management, Jouybar Branch, Islamic Azad University, Jouybar, Iran.

4 Department of Accounting, Ahvaz Branch, Karoun Non-Profit University, Ahvaz, Iran

Abstract

Objective: Digital transformation has recently become a central driver of corporate development and competitiveness in Iran. Many firms attempted to signal innovation and technological advancement through digital disclosures. However, in some cases, these disclosures were accompanied by “digital washing,” whereby firms exaggerated or overstated their actual level of digital maturity, potentially misleading capital market participants. The objective of this study was to examine the effect of digital washing on accounting conservatism and to analyze the moderating roles of analyst coverage, investor sentiment, and executive compensation in firms listed on the Tehran Stock Exchange. This study aimed to clarify whether market monitoring mechanisms and managerial incentives could mitigate the negative consequences of digital washing on financial reporting quality.
Methods: This research was applied in purpose and descriptive–correlational in methodology. The statistical population consisted of all firms listed on the Tehran Stock Exchange during the period 2013–2024. After applying the research criteria, a final sample of 280 firms was selected. Required data were collected from financial statements, board reports, and capital market information. Multivariate regression models were employed to test the hypotheses, and the moderating effects of analyst coverage, investor sentiment, and executive compensation were examined through interaction terms. The research design enabled a comprehensive assessment of the analytical relationships between digital washing and accounting conservatism.
Results: The findings indicate that digital washing has a significant negative effect on accounting conservatism and reduces the level of prudence in the recognition of profits and losses. The results also show that analyst coverage plays a significant moderating role, such that stronger analyst monitoring weakens the negative impact of digital washing on accounting conservatism. Investor sentiment is found to moderate this relationship as well, suggesting that optimistic or pessimistic market conditions influence how digital washing affects conservative reporting practices. Furthermore, the findings reveal that higher executive compensation is associated with greater accounting conservatism and can partially offset the adverse effects of digital washing on financial reporting quality.
Conclusion: The results demonstrate that digital washing undermines accounting transparency and financial reporting quality, leading to important implications for investors, regulators, and corporate managers. The study further shows that capital market mechanisms, including analyst coverage and investor sentiment, along with executive compensation structures, play a crucial role in constraining the negative consequences of digital washing. Strengthening oversight of digital disclosures and aligning managerial incentives with long-term reporting quality can enhance accounting conservatism and market confidence.
Innovation: The main innovation of this study lies in simultaneously examining the impact of digital washing on accounting conservatism while incorporating the moderating roles of capital market factors and managerial incentives. By providing empirical evidence from the Iranian capital market, this research fills a gap in the literature on digital transformation and financial reporting quality and offers an analytical framework for assessing the accounting and behavioral consequences of digital disclosures.

Keywords

References

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Journal of Finance and Corporate Sustainability
Volume 1, Issue 2 - Serial Number 2
February 2026
Pages 142-169

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History

  • Receive Date: 15 December 2025
  • Revise Date: 01 February 2026
  • Accept Date: 04 February 2026
  • First Publish Date: 04 February 2026
  • Publish Date: 21 January 2026

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