Earnings Quality, Corporate Governance and Firm Performance

Abstract

Quality of earnings as reflected by the lower absolute discretionary accruals in the accounting disclosures of firms identifies whether firms manage their earnings disclosure in order to meet market expectations. Literature evidence suggests that corporate governance initiatives of firms have improved the earnings quality of firms. This research identifies the relationship between earnings quality and firm performance in order to test the ability of market to infer managed earnings. In addition corporate governance initiatives taken by the firms and its influence on earnings quality is examined to improve governance and reporting practices of firms towards true firm valuation by the market. Further across the industry comparison of earnings quality and firm performance and their influence by governance initiatives examine industry specific practices in India.

Keywords: Earnings quality, firm valuation, corporate governance, opportunist theory, efficient contracting theory