Capital Market Implications of Earnings Quality

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BoD – Books on Demand, 2010 - Business & Economics - 257 pages
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In his speech from 1998 the former chairman of the United States Securities and Exchange Commission (SEC) Arthur Levitt pointed out that trust "is the bedrock of our capital markets" and that this must not be shaken by the erosion of earnings quality. He made clear that it is the challenge of the whole financial community to counteract such a development. This thesis deals with the question whether the importance of earnings for the capital market varies with its quality. The question arises, because in recent years a large number of firm scandals has shaken the trust in the reliability of reported earnings. In order to properly address the research questions, the literature on earnings quality definitions, quality measures as well as implications of earnings quality on capital markets is reviewed and critically discussed. The author investigates whether well known results concerning capital market implications of earnings quality remain stable for all measures considered. She answers the question of how earnings quality affects firm value, cost of equity capital, and the accuracy of analysts' forecasts taking into account the effects of determinants of earnings quality.
 

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Contents

Important Accounting Fundamentals
7
Earnings Quality Measurement Concepts suggested in Previous Literature
17
Previous Literature concerning the Importance of Earnings Quality for
47
Endogeneity of Earnings Quality and Classification of Determinants
73
Importance of Earnings Quality for the Capital
87
Summary and Conclusion
125
Bibliography
244
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About the author (2010)

Bianca Ahrens has studied business administration at the University of Cologne. After her graduation she has worked as a scientific research assistant at the Chair of Corporate Finance of the University of Cologne. She was being awarded a doctorate in 2009 and currently works as a risk manager for an asset manager.

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