Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences
Patricia M. Dechow
University of California, Berkeley - Haas School of Business
University of Washington - Michael G. Foster School of Business
Catherine M. Schrand
University of Pennsylvania - Accounting Department
August 31, 2010
Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.
Number of Pages in PDF File: 164
Keywords: earnings quality, accruals, earnings persistence, earnings response coefficient
JEL Classification: M41, G30
Date posted: October 10, 2009 ; Last revised: November 25, 2011
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