Understanding earnings quality - MIT Sloan School of Management

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*Title Page/Author Identifier Page/
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Street equity valuation model as ea
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earnings quality proxy is the indep
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of fundamental earnings will be a f
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contributions of the fundamental co
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accruals, in total or individually,
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While we identify these contradicti
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Proxies for asymmetric timeliness b
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sample. Hence, sample specific char
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unintentional misstatements, which
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Empirical studies have examined mul
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there are (in theory) predictable a
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is primarily driven by the firm’s
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methodology. Studies could make uni
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The discussion of earnings persiste
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and documents that β2 < β1, which
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1993). 12 The studies find conflict
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Xie (2001) uses the Jones model (di
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sophisticated investors do understa
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measurement. Nwaeze, Yang, and Yin
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and better reflects revenue manipul
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All of the accruals models can be e
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Second, investors seem to recognize
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fact improve predictability relativ
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lower book values of assets (higher
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than code law countries. The differ
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explain the kink. Durtschi and East
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with overstated net asset values ar
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earnings quality. The studies speci
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to conservatism, which is defined a
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they assert proxy for lower indepen
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paper, however, finds that firms ar
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Debt covenants: Dechow et al. (1996
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eadjustments in valuations associat
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ange of misstatements and they are
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significantly change the historical
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the firm’s public accountants mus
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whether disclosure of material weak
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with “shareholder” corporate go
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accruals) that stems from the confl
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observable variables such as natura
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and do not appear to be made to boo
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firms identified in the AAERs than
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past service costs). Zmijewski and
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5.2 Financial reporting practices a
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5.2.2 Other financial reporting pra
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The notion that accounting method c
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quality and the quality of M&A deci
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In countries with high ownership co
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for the AAER firm executives than f
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Dechow and Sloan (1991), who study
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management related to incentives pr
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nonaudit fees) and discretionary ac
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errors when litigation risk is high
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to suffer from omitted correlated v
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capital accruals as a proxy. Perry
Page 113 and 114: how the incentives provided by the
Page 115 and 116: (Jones, 1991); 2) Department of Jus
Page 117 and 118: 5.6.3 Tax regulations Several studi
Page 119 and 120: importance of implicit claims, they
Page 121 and 122: attention (Aboody et al. , 1999). 7
Page 123 and 124: of internal control procedure defic
Page 125 and 126: differences, which investors ration
Page 127 and 128: Bid-ask spread: Evidence on the ass
Page 129 and 130: low accrual quality stock that are
Page 131 and 132: 6.1.5 Summary To summarize, the evi
Page 133 and 134: plaintiffs will prevail in sharehol
Page 135 and 136: income increasing restatement firms
Page 137 and 138: evisions do not fully account for t
Page 139 and 140: the fact that some disclosures are
Page 141 and 142: Therefore, the proxies are not meas
Page 143 and 144: Amir, E., Harris, T., Venuti, E., 1
Page 145 and 146: Beasley, M., 1996. An empirical ana
Page 147 and 148: Burgstahler, D., Kinney, W., Martin
Page 149 and 150: Considine, J., Mensah, Y., Oakes, L
Page 151 and 152: Desai, H., Rajgopal, S., Venkatacha
Page 153 and 154: Farber, D., 2005. Restoring trust a
Page 155 and 156: Gong, G., Louis, H., Sun, A., 2008.
Page 157 and 158: Hung, M., 2000. Accounting standard
Page 159 and 160: Kothari, S., Leone, A., Wasley, C.,
Page 161 and 162: Malmquist, D., 1990. Efficient cont
Page 163: Phillips, F., 1999. Auditor attenti
Page 167 and 168: Figure 1. Summary of the investigat
Page 169 and 170: Figure 3: Key links between determi
Page 171 and 172: Table 1. Categories of “Earnings
Page 173 and 174: Exhibit 1: Summary of earnings qual
Page 175: Exhibit 2: Summary of widely used m
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