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Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences


Patricia M. Dechow


University of California, Berkeley - Haas School of Business

Weili Ge


University of Washington - Michael G. Foster School of Business

Catherine M. Schrand


University of Pennsylvania - Accounting Department

August 31, 2010


Abstract:     
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

working papers series





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Date posted: October 10, 2009 ; Last revised: November 25, 2011

Suggested Citation

Dechow, Patricia M. and Ge, Weili and Schrand, Catherine M., Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences (August 31, 2010). Available at SSRN: http://ssrn.com/abstract=1485858 or http://dx.doi.org/10.2139/ssrn.1485858

Contact Information

Patricia M. Dechow
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
Weili Ge
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195-3200
United States
Catherine M. Schrand (Contact Author)
University of Pennsylvania - Accounting Department ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6798 (Phone)
215-573-2054 (Fax)

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