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

164 Pages Posted: 10 Oct 2009 Last revised: 25 Nov 2011

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting; University of California, Berkeley - Accounting Group

Weili Ge

University of Washington - Michael G. Foster School of Business

Catherine M. Schrand

University of Pennsylvania - Accounting Department

Date Written: 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.

Keywords: earnings quality, accruals, earnings persistence, earnings response coefficient

JEL Classification: M41, G30

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: https://ssrn.com/abstract=1485858 or http://dx.doi.org/10.2139/ssrn.1485858

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
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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