Abstract

http://ssrn.com/abstract=2347428
 


 



A Guide to Earnings Quality


Ilia D. Dichev


Emory University - Goizueta Business School

John R. Graham


Duke University; NBER

Campbell R. Harvey


Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Shivaram Rajgopal


Emory University - Goizueta Business School

October 30, 2013


Abstract:     
This teaching guide is based on a comprehensive survey as well as in-depth interviews of Chief Financial Officers (CFOs). We ask the CFOs about the definition and drivers of earnings quality, with a special emphasis on the prevalence and detection of earnings misrepresentation. CFOs believe that the hallmarks of earnings quality are sustainability, absence of one-time items, and backing by actual cash flows. Earnings quality is determined in about equal measure by controllable factors like internal controls and corporate governance, and non-controllable factors like industry membership and macroeconomic conditions. On earnings misrepresentation, CFOs believe that in any given period a remarkable 20% of firms intentionally distort earnings, even though they are adhering to generally accepted accounting principles. The economic magnitude of the misrepresentation is large, averaging about 10% of reported earnings. While most misrepresentation involves earnings overstatement, interestingly, one third of the firms that are misrepresenting performance are low-balling their earnings or reversing a prior intentional overstatement. Finally, CFOs provide a list of red flags that can be used to detect earnings misrepresentation.

Detailed tables and references are available at http://ssrn.com/abstract=2103384.

Number of Pages in PDF File: 23

Keywords: Earnings management, earnings misrepresentation, real earnings management, earnings fraud, earnings overstatement, earnings distortion, earnings quality, one-time items, sustainable earnings, persistent earnings, accruals, real earnings management, earnings red flags, corporate governance

JEL Classification: M40, M41, M42, M48, G32, G38

working papers series


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Date posted: October 31, 2013  

Suggested Citation

Dichev, Ilia D. and Graham, John R. and Harvey, Campbell R. and Rajgopal, Shivaram, A Guide to Earnings Quality (October 30, 2013). Available at SSRN: http://ssrn.com/abstract=2347428 or http://dx.doi.org/10.2139/ssrn.2347428

Contact Information

Ilia D. Dichev
Emory University - Goizueta Business School ( email )
1300 Clifton Road
Atlanta, GA 30322-2722
United States
John Robert Graham
Duke University ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)
NBER
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Shivaram Rajgopal
Emory University - Goizueta Business School ( email )
1300 Clifton Road
Atlanta, GA 30322-2722
United States
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