Earnings Quality by Jennifer Francis, Per Olsson, Katherine Schipper

By Jennifer Francis, Per Olsson, Katherine Schipper

Gains caliber experiences present examine actions round profits caliber. It offers an summary of other definitions and measures of gains caliber and a dialogue of analysis layout offerings encountered in gains caliber learn with a spotlight on capital markets. profits caliber examines how the precision of economic details impacts the evaluate and use of that details by means of capital industry contributors. The authors' major concentration is at the precision of gains, that's considered as a precis indicator of the general caliber of monetary reporting. The authors evaluation: ·earnings caliber and position profits caliber within the context of total capital marketplace info caliber ·the determinants of profits caliber, commonly separated into intrinsic determinants that derive from company types and working environments and reporting determinants that derive from the management's implementation judgements in monetary reporting approach ·twelve measures of gains caliber supplying examples of study utilizing those measures, and provide perspectives on which measures are ultimate in a given context. ·research layout concerns and examine findings bearing on the capital industry results of gains caliber, particularly its organization with anticipated returns (or the price of capital) and unforeseen (abnormal) returns gains caliber may be of curiosity to many members within the monetary reporting approach together with regular setters, preparers, auditors, regulators, analysts, and fiscal press commentators. it's going to be of equivalent curiosity to accounting educators and researchers.

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Earnings with greater explanatory power are viewed as more desirable; that is, earnings that explain greater variation in returns are of higher quality. , Francis and Schipper (1999); Collins et al. (1997); Bushman et al. (2004)), value relevance is based on the explanatory power (the adjusted R2 ) of the following regression of returns on the level and change in earnings: RETj,t = δ0,j + δ1,j EARNj,t + δ2,j ∆EARNj,t + ζj,t . 4) Small (large) values of the adjusted R2 imply less (more) value relevant earnings.

1%. Therefore, for their sample, the non-current portion of accruals is over three times the size of the current portion. Ecker et al. (2005) use a variety of statistical methods to estimate the relation between total accruals (that is, both current and non-current accruals) and prior, current and future period free cash flows. Their analysis is complicated by the fact that, unlike current accruals which should reverse within one year, the reversal periods of non-current accruals vary by the type of accrual as well as by accounting implementation choices.

1995); Gul and Wah (2002); Yeo et al. (2002)). 32 Determinants of Earnings Quality For a large sample of East Asian firms, Fan and Wong (2002) posit that when voting rights and cash flow rights diverge, concentrated ownership is associated with lower quality earnings because of an entrenchment effect (the controlling shareholder has the ability to report self-interestedly) and an information effect (there are incentives to disclose as little proprietary information as possible). However, high levels of management ownership create an incentive effect, which acts to align managers’ interests with those of shareholders, producing higher quality earnings.

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