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Earnings Quality (earning + quality)
Selected AbstractsTaxable Income as a Performance Measure: The Effects of Tax Planning and Earnings Quality,CONTEMPORARY ACCOUNTING RESEARCH, Issue 1 2009Benjamin C. Ayers First page of article [source] CEO Reputation and Earnings Quality,CONTEMPORARY ACCOUNTING RESEARCH, Issue 1 2008Jennifer Francis First page of article [source] Earnings Quality and the Equity Risk Premium: A Benchmark Model,CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2006Kenton K. Yee Abstract This paper solves a model that links earnings quality to the equity risk premium in an infinite-horizon consumption capital asset pricing model (CAPM) economy. In the model, risk-averse traders hold diversified portfolios consisting of risk-free bonds and shares of many risky firms. When constructing their portfolios, traders rely on noisy reported earnings and dividend payments for information about the risky firms. The main new element of the model is an explicit representation of earnings quality that includes hidden accrual errors that reverse in subsequent periods. The model demonstrates that earnings quality magnifies fundamental risk. Absent fundamental risk, poor earnings quality cannot affect the equity risk premium. Moreover, only the systematic (undiversified) component of earnings-quality risk contributes to the equity risk premium. In contrast, all components of earnings-quality risk affect earnings capitalization factors. The model ties together consumption CAPM and accounting-based valuation research into one price formula linking earnings quality to the equity risk premium and earnings capitalization factors. [source] Earnings Quality under Rules- versus Principles-based Accounting Standards: A Test of the Skinner Hypothesis / LA QUALITÉ DES RÉSULTATS SELON QUE LES NORMES COMPTABLES SONT AXÉES SUR LES RÈGLES OU SUR LES PRINCIPES: VÉRIFICATION DE L'HYPOTHÈSE DE SKINNER,ACCOUNTING PERSPECTIVES, Issue 2 2005ERIN WEBSTER ABSTRACT We provide preliminary evidence, consistent with Skinner (1995), that Canada's relatively principles-based GAAP yield higher accrual quality than the United States' relatively rules-based GAAP. These results stem from a comparison of the Dechow-Dichev (2002) measure of accrual quality for cross-listed Canadian firms reporting under both Canadian and U.S. GAAP. However, we document lower accrual quality for Canadian firms reporting under U.S. GAAP than for U.S. firms, which are subject to stronger U.S. oversight, reporting under U.S. GAAP. The latter results suggest that stronger U.S. oversight compensates for inferior accrual quality associated with rules-based GAAP. Consistent with the positive effect of Canada's principles-based GAAP and the offsetting negative effect of Canada's weaker oversight, we find no overall difference in accrual quality between Canadian firms reporting under Canadian GAAP and U.S. firms reporting under U.S. GAAP. Our results imply that (1) policymakers who wish to compare the effectiveness of oversight across jurisdictions must control for the GAAP effect; and (2) accounting standard-setters who wish to compare the effectiveness of principles- versus rules-based GAAP must control for oversight strength. [source] Voluntary Disclosure, Earnings Quality, and Cost of CapitalJOURNAL OF ACCOUNTING RESEARCH, Issue 1 2008JENNIFER FRANCIS ABSTRACT We investigate the relations among voluntary disclosure, earnings quality, and cost of capital. We find that firms with good earnings quality have more expansive voluntary disclosures (as proxied by a self-constructed index of coded items found in 677 firms' annual reports and 10-K filings in fiscal 2001) than firms with poor earnings quality. In unconditional tests, we find that more voluntary disclosure is associated with a lower cost of capital. However, consistent with the complementary association between disclosure and earnings quality, we find that the disclosure effect on cost of capital is substantially reduced or disappears completely (depending on the cost of capital proxy) once we condition on earnings quality. Extensions probing alternative proxies show that our findings are robust to measures of earnings quality and cost of capital, but not to other measures of voluntary disclosure. In particular, we find opposite relations for voluntary disclosure measures based on management forecasts and conference calls, and we find no relations for a press release based measure. [source] Corporate Debt Financing and Earnings QualityJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 5-6 2010Aloke (Al) Ghosh Abstract:, Our study establishes linkages between two extensively researched areas, debt financing and the quality of earnings. Debt can have a ,positive influence'on earnings quality because managers are likely to use their accounting discretion to provide private information about the firms' future prospects to lower financing costs. For high debt, it can also have a ,negative influence' on earnings quality as managers use accruals aggressively to manage earnings to avoid covenant violations. Using accruals quality as a proxy for earnings quality, we document a non-monotonic (curvilinear) relation between debt and earnings quality. The relationship is positive at low levels of debt and negative at high debt levels with an inflection point around 41%. Our results suggest that firms that rely heavily on debt financing might be willing to bear higher costs of borrowing from lower earnings quality because the benefits from avoiding potential debt covenant violations exceed the higher borrowing costs. [source] Private Equity Involvement and Earnings QualityJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 5-6 2009Christof Beuselinck Abstract:, This paper examines the relation between private equity (PE) investors' involvement and their portfolio firms' earnings quality. We operationalize earnings quality through comparative analyses of conditional loss recognition timeliness. For a sample of unlisted Belgian firms, we find that PE involvement increases a firm's willingness to recognize losses more timely as compared to industry, size and life-cycle matched non-PE backed firms. Further, we document more powerful earnings quality effects for firms backed by independent and captive PE-investors as compared to firms backed by government-related PE-investors. Finally, we find no systematic variation in earnings quality across different levels of PE ownership. Our results are robust to the inclusion of various controls and remain unaffected when we consider the endogeneity of PE investments and compare pre- and post PE investment years. The current results provide novel evidence towards the understanding of PE investors' governance implications for portfolio firms' earnings quality. [source] The Effect of SOX Section 404: Costs, Earnings Quality, and Stock PricesTHE JOURNAL OF FINANCE, Issue 3 2010PETER ILIEV ABSTRACT This paper exploits a natural quasi-experiment to isolate the effects that were uniquely due to the Sarbanes,Oxley Act (SOX): U.S. firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor's attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. On net, SOX compliance reduced the market value of small firms. [source] Market Implications of the Audit Quality and Auditor Switches: Evidence from ChinaJOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING, Issue 1 2009Z. Jun Lin Independent audits enhance the credibility of corporate financial reports and assist investors to make rational decisions in the capital market. Nonetheless, the utility of the auditing function depends upon the quality of audits, which is determined by the independence and expertise of auditors. Hence, auditor choice and switch will not only affect an audit's quality, but will also influence decisions made by investors and other market participants. The purpose of this paper is to investigate how investors respond to the quality of audits and auditor switches in the Chinese context. Empirical results show that the quality of an audit and switching to a larger auditor have a positive (negative) impact on earnings response coefficients (ERCs) for firms with positive (negative) abnormal earnings. In contrast, switching to a smaller auditor has a negative (positive) impact on ERCs for firms with positive (negative) abnormal earnings. These results suggest that large auditing firms (Top 10) in China are perceived as more effective for curbing income-increased earnings management, which leads to higher (lower) ERCs for clients with positive (negative) abnormal earnings. Firms' switching to a larger auditor may signal high-quality earnings. Therefore, investors more often increase stock prices when firms have positive abnormal earnings and less often depreciate prices for negative abnormal earnings. Similarly, switching to a smaller auditor may signal lower earning quality, resulting in opposite market responses. In general, the empirical evidence suggests that audit information is valued by the capital market in China. Large auditing firms have been able to product-differentiate themselves within the Chinese stock market. [source] Credit Ratings and Taxes: The Effect of Book,Tax Differences on Ratings ChangesCONTEMPORARY ACCOUNTING RESEARCH, Issue 2 2010BENJAMIN C. AYERS G29; H25; H32; M41 This paper examines whether credit analysts utilize the information contained in the difference between book and taxable income in analyzing a firm's credit risk. Increased book,tax differences may be informative for credit rating agencies as they may signal decreased earnings quality or changes in the firm's off,balance sheet financing. Results suggest a significant negative association between positive changes in book,tax differences and ratings changes. This evidence is consistent with large positive changes in book,tax differences signaling decreased earnings quality and/or increased off,balance sheet financing. We also find that large negative changes in book,tax differences result in less favorable rating changes, consistent with these changes signaling decreased earnings quality. In additional analyses, we find that the association between changes in book,tax differences and rating changes is attenuated for high,tax-planning firms (e.g., where book,tax differences more likely reflect tax planning than decreased earnings quality). [source] Earnings Quality and the Equity Risk Premium: A Benchmark Model,CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2006Kenton K. Yee Abstract This paper solves a model that links earnings quality to the equity risk premium in an infinite-horizon consumption capital asset pricing model (CAPM) economy. In the model, risk-averse traders hold diversified portfolios consisting of risk-free bonds and shares of many risky firms. When constructing their portfolios, traders rely on noisy reported earnings and dividend payments for information about the risky firms. The main new element of the model is an explicit representation of earnings quality that includes hidden accrual errors that reverse in subsequent periods. The model demonstrates that earnings quality magnifies fundamental risk. Absent fundamental risk, poor earnings quality cannot affect the equity risk premium. Moreover, only the systematic (undiversified) component of earnings-quality risk contributes to the equity risk premium. In contrast, all components of earnings-quality risk affect earnings capitalization factors. The model ties together consumption CAPM and accounting-based valuation research into one price formula linking earnings quality to the equity risk premium and earnings capitalization factors. [source] Market Response to Earnings Surprises Conditional on Reasons for an Auditor Change,CONTEMPORARY ACCOUNTING RESEARCH, Issue 2 2002Karl E. Hackenbrack Abstract Our interest in this study is the relative informativeness of earnings announcements reported before and after Form 8-K disclosures of the reason for an auditor change. We appeal to several models that predict that the market's response to an earnings surprise is positively related to the perceived precision of the earnings report. We predict that the Form 8-K reason disclosures aid investors in updating their expectations of earnings precision by providing useful information about the financial reporting process that produces the earnings report. For 802 auditor changes from late 1991 through late 1997, the average price response per unit of earnings surprise is lower subsequent to an auditor change for companies that switched for disagreement-related or fee-related reasons and higher for those that switched for service-related reasons. This paper provides further evidence on the effects of differential earnings quality on differences in the returns-earnings relation across companies and over time as well as the efficacy of Form 8-K disclosures of reasons for auditor changes. [source] Climate for Scandal: Corporate Environments that Contribute to Accounting FraudFINANCIAL REVIEW, Issue 1 2007Claire E. Crutchley G34; G38; K22 Abstract We examine the governance characteristics, earnings quality, growth rates, dividend policy, and compensation structure of 97 firms recently under investigation by the Securities and Exchange Commission (SEC) for accounting fraud. Our results show that the corporate environment most likely to lead to an accounting scandal manifests significant growth and accounting practices that are already pushing the envelope of earnings smoothing. Firms operating in this environment seem more likely to tip over the edge into fraud if there are fewer outsiders on the audit committee and outside directors appear overcommitted. [source] Earnings characteristics and analysts' differential interpretation of earnings announcements: An empirical analysisACCOUNTING & FINANCE, Issue 2 2009Anwer S. Ahmed G14; M41 Abstract This study provides empirical evidence on factors that drive differential interpretation of earnings announcements. We document that Kandel and Pearson's forecast measures of differential interpretation are decreasing in proxies for earnings quality and pre-announcement information quality. This evidence yields new and useful insights regarding which earnings announcements are less likely to generate newfound disagreement among analysts and investors. Recent research suggests that investor disagreement can increase investment risk, increase the cost of capital, and cause stock prices to deviate from fundamental value. Therefore, our results support prior intuition that increasing the quality of earnings and pre-announcement information can improve the efficiency of capital markets. [source] Audit committees and earnings qualityACCOUNTING & FINANCE, Issue 2 2009Peter Baxter G30; G38; M41 Abstract This research investigates whether audit committees are associated with improved earnings quality for a sample of Australian listed companies prior to the introduction of mandatory audit committee requirements in 2003. Two measures of earnings quality are used based on models first developed by Jones (1991) and Dechow and Dichev (2002). Our results indicate that formation of an audit committee reduces intentional earnings management but not accrual estimation errors. We also find differences in the associations between audit committee accounting expertise and the two earnings quality measures. Other audit committee characteristics examined are not significantly related to either earnings quality measure. [source] Voluntary Disclosure, Earnings Quality, and Cost of CapitalJOURNAL OF ACCOUNTING RESEARCH, Issue 1 2008JENNIFER FRANCIS ABSTRACT We investigate the relations among voluntary disclosure, earnings quality, and cost of capital. We find that firms with good earnings quality have more expansive voluntary disclosures (as proxied by a self-constructed index of coded items found in 677 firms' annual reports and 10-K filings in fiscal 2001) than firms with poor earnings quality. In unconditional tests, we find that more voluntary disclosure is associated with a lower cost of capital. However, consistent with the complementary association between disclosure and earnings quality, we find that the disclosure effect on cost of capital is substantially reduced or disappears completely (depending on the cost of capital proxy) once we condition on earnings quality. Extensions probing alternative proxies show that our findings are robust to measures of earnings quality and cost of capital, but not to other measures of voluntary disclosure. In particular, we find opposite relations for voluntary disclosure measures based on management forecasts and conference calls, and we find no relations for a press release based measure. [source] Corporate Debt Financing and Earnings QualityJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 5-6 2010Aloke (Al) Ghosh Abstract:, Our study establishes linkages between two extensively researched areas, debt financing and the quality of earnings. Debt can have a ,positive influence'on earnings quality because managers are likely to use their accounting discretion to provide private information about the firms' future prospects to lower financing costs. For high debt, it can also have a ,negative influence' on earnings quality as managers use accruals aggressively to manage earnings to avoid covenant violations. Using accruals quality as a proxy for earnings quality, we document a non-monotonic (curvilinear) relation between debt and earnings quality. The relationship is positive at low levels of debt and negative at high debt levels with an inflection point around 41%. Our results suggest that firms that rely heavily on debt financing might be willing to bear higher costs of borrowing from lower earnings quality because the benefits from avoiding potential debt covenant violations exceed the higher borrowing costs. [source] Private Equity Involvement and Earnings QualityJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 5-6 2009Christof Beuselinck Abstract:, This paper examines the relation between private equity (PE) investors' involvement and their portfolio firms' earnings quality. We operationalize earnings quality through comparative analyses of conditional loss recognition timeliness. For a sample of unlisted Belgian firms, we find that PE involvement increases a firm's willingness to recognize losses more timely as compared to industry, size and life-cycle matched non-PE backed firms. Further, we document more powerful earnings quality effects for firms backed by independent and captive PE-investors as compared to firms backed by government-related PE-investors. Finally, we find no systematic variation in earnings quality across different levels of PE ownership. Our results are robust to the inclusion of various controls and remain unaffected when we consider the endogeneity of PE investments and compare pre- and post PE investment years. The current results provide novel evidence towards the understanding of PE investors' governance implications for portfolio firms' earnings quality. [source] The Provision of Tax Services by Incumbent Auditors and Earnings Management: Evidence from KoreaJOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING, Issue 1 2009Won-Wook Choi This study examines the associations between the provision of tax services by incumbent auditors and earnings management. We investigate whether three different effects of tax service provision play different roles in accounting practices. The three effects include the audit independence effect, the knowledge spillover effect, and the tax avoidance effect. If the provision of tax services by incumbent auditors harms auditor independence, firms may exercise greater earnings management (audit independence effect). However, if incumbent auditors gain incremental knowledge by offering tax services, the quality of their audit services could be enhanced, and therefore, reported earnings could be more conservative (knowledge spillover effect). If tax service fee leads to low taxable income, it could depress book income when book-tax conformity is high (tax avoidance effect). We find that the provision of tax services generally improves earnings quality by curtailing opportunistic accounting practices. The results also suggest that the negative association between the provision of tax services and discretionary accruals seems to be primarily driven by the knowledge spillover effect as opposed to the tax avoidance effect. Additional analysis is conducted in examining whether the tax avoidance effect exists in a sub-sample. [source] Impact of Government Ownership on Investment Banks' Underwriting Performance: Evidence from China,ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 2 2010Ning Jia G21; G24; G28 Abstract This paper examines the effect of government ownership on investment banks' underwriting performance in China. A large number of Chinese investment banks are owned and controlled by their respective regional governments. While regional governments may capitalize on their superior local knowledge and administrative power to help affiliated investment banks identify and land high quality local issuers, they may also leverage affiliated underwriters to facilitate the capital market access of those underperformed but socially and/or politically desirable local firms. Empirical evidence favors the latter hypothesis. Specifically, using a sample of regional IPOs, we find that issuers underwritten by their respective regional government-affiliated investment banks exhibit lower earnings quality and poorer long-term performance compared with those underwritten by unaffiliated investment banks. However, this difference is attenuated after the abolition of the IPO quota system. Examination of underwriting fees and issuers' shareholder identity provides additional evidence supporting the latter hypothesis. [source] | ||||||||||||||||||||||