Capital Market Implications of Earnings Quality
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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Important Accounting Fundamentals
Earnings Quality Measurement Concepts suggested in Previous Literature
Previous Literature concerning the Importance of Earnings Quality for
Endogeneity of Earnings Quality and Classiﬁcation of Determinants
Accounting and Economics Accounting Research Accounting Review accrual quality analyst forecast artiﬁcial assets Auditor calculated Capital by Industry capital market implications cash ﬂows coefﬁcients Compustat conservatism correlation cost of capital cost of equity DAcc2 Dechow and Dichev deﬁned deﬁnition of earnings determinants of earnings discretionary accruals discretionary component earnings and cash earnings management earnings number earnings quality measures earnings surprises earnings-price-ratio effect empirical EPSt Equity Capital Errors by Industry Fama/MacBeth ﬁnancial statement ﬁnd ﬁndings ﬁrm value ﬁrm-speciﬁc ﬁrm’s ﬁrst Forecast Errors Francis future impact of earnings Implications of Earnings implied Cost income Industry-adjusted industry-speciﬁc inﬂuence information asymmetry information risk Intangibles investigations investors Journal of Accounting Kothari LaFond Leuz literature Lundholm Nanda non-discretionary Olsson Penman Pers2 persistence Pred1 predictability proxies quantiﬁcations reﬂected regression reported earnings sample Schipper signiﬁcant signiﬁcantly Sloan Smooth1 smoothing speciﬁcations standard deviation stock returns Table time-series timeliness valuation value relevance volatility Wysocki