Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences
164 Pages Posted: 10 Oct 2009 Last revised: 25 Nov 2011
Date Written: 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.
Keywords: earnings quality, accruals, earnings persistence, earnings response coefficient
JEL Classification: M41, G30
Suggested Citation: Suggested Citation