Earning Quality

In: Business and Management

Submitted By redhairshank
Words 58742
Pages 235
Journal of Accounting and Economics 50 (2010) 344–401

Contents lists available at ScienceDirect

Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae

Understanding earnings quality: A review of the proxies, their determinants and their consequences$
Patricia Dechow a, Weili Ge b, Catherine Schrand c,n a b c University of California, Berkeley, CA 94720, United States
University of Washington, Seattle, WA 98195, United States
University of Pennsylvania, Philadelphia, PA 19104, United States

a r t i c l e i n f o

abstract

Available online 4 November 2010

Researchers have used various measures as indications of ‘‘earnings quality’’ including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because ‘‘quality’’ is contingent on the decision context. We also point out that the ‘‘quality’’ of earnings is a function of the firm’s fundamental performance. The contribution of a firm’s fundamental performance to its earnings quality is suggested as one area for future work.
& 2010 Elsevier B.V. All rights reserved.

JEL classification:
G31
M40
M41
Keywords:
Earnings quality
Earnings management
Review
Survey

1. Introduction
Statement of Financial Accounting Concepts No. 1 (SFAC No. 1) states that ‘‘Financial reporting should provide information about an enterprise’s financial performance during a period.’’ Borrowing language from SFAC No. 1, we define earnings quality as follows:
Higher quality earnings provide more information about the features of a firm’s financial performance that are relevant to a specific decision made by a specific…...

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