Does the Earnings Quality Matter? Evidence from a Quasi-Experimental Setting

12 Pages Posted: 16 Nov 2011 Last revised: 6 Nov 2016

See all articles by Giulia Baschieri

Giulia Baschieri

University of Bologna - Department of Management

Andrea Carosi

University of Sassari - Department of Economics and Business

Stefano Mengoli

University of Bologna - Department of Management

Abstract

Investor preference for local stocks provides a quasi-experimental setting to investigate whether the market rewards firms that comply with generally accepted accounting principles. We show firms with low earnings quality trade at a premium compared to firms in compliance with accounting principles; the difference in values is greater when the role of local investor over-trading is stronger in stock price-formation, in other words for the more isolated firms. The value of the information not conveyed to the market through accounting disclosure accounts for 30% of the market-to-book. Results are robust to earnings quality definition, and show while non-local investors are sensitive to the quality of accounting information, local and better-informed investors are not. Overall, accounting quality matters.

Keywords: Earnings Quality, Accounting Information, Local Home Bias

JEL Classification: M41, G11, G12

Suggested Citation

Baschieri, Giulia and Carosi, Andrea and Mengoli, Stefano, Does the Earnings Quality Matter? Evidence from a Quasi-Experimental Setting. Finance Research Letters, Vol. 19, November 2016, pp. 146-157, Available at SSRN: https://ssrn.com/abstract=1959856 or http://dx.doi.org/10.2139/ssrn.1959856

Giulia Baschieri

University of Bologna - Department of Management ( email )

Via Capo di Lucca 34
Bologna, Bologna 40126
Italy

Andrea Carosi

University of Sassari - Department of Economics and Business ( email )

Via Muroni, 25
Sassari, Sassari 07100
Italy
+39 079 213036 (Phone)

Stefano Mengoli (Contact Author)

University of Bologna - Department of Management ( email )

Via Capo di Lucca, 24
http://stefanomengoli.weebly.com/
Bologna, Bologna 40132
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
407
Abstract Views
2,050
rank
91,420
PlumX Metrics