Earnings Quality and Financial Reporting Credibility: An Empirical Investigation

42 Pages Posted: 22 Aug 1999

See all articles by Mark T Bradshaw

Mark T Bradshaw

Boston College

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Date Written: July 1999

Abstract

Existing research indicates that firms with high accruals are more likely to experience future earnings reversals and SEC enforcement actions for GAAP violations, but that investors do not appear to anticipate these consequences. In this paper, we directly examine the published opinions of two types of professional investor intermediaries to see if they anticipate the consequences of high accruals. First, we examine the earnings forecasts of sell-side analysts. We show that analysts' earnings forecasts do not anticipate the future earnings reversals associated with high accruals. Second, we examine the audit opinions of independent auditors. We find no evidence that auditors signal the higher likelihood of GAAP violations through their audit opinions. Overall, our evidence indicates that even professional investor intermediaries act as if they do not anticipate the consequences of high accruals.

JEL Classification: G12, M41, M49, G29

Suggested Citation

Bradshaw, Mark T and Richardson, Scott Anthony and Sloan, Richard G., Earnings Quality and Financial Reporting Credibility: An Empirical Investigation (July 1999). Available at SSRN: https://ssrn.com/abstract=170558 or http://dx.doi.org/10.2139/ssrn.170558

Mark T Bradshaw

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Richard G. Sloan (Contact Author)

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

Los Angeles, CA 90089-0441
United States

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