Understanding earnings quality - MIT Sloan School of Management
Understanding earnings quality - MIT Sloan School of Management
Understanding earnings quality - MIT Sloan School of Management
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Figure 2. Summary <strong>of</strong> the investigated consequences <strong>of</strong> <strong>earnings</strong> <strong>quality</strong><br />
Figure 2 summarizes the outcomes resulting from (“consequences” <strong>of</strong>) the various <strong>earnings</strong> <strong>quality</strong> proxies. The rows represent the most frequently hypothesized<br />
consequences <strong>of</strong> <strong>earnings</strong> <strong>quality</strong> and correspond to the organization <strong>of</strong> the discussion in Sections 6.1 and 6.2. The columns represent our categories <strong>of</strong><br />
commonly used <strong>earnings</strong> <strong>quality</strong> proxies. A shaded box indicates that researchers have investigated whether the <strong>earnings</strong> <strong>quality</strong> proxy explains variation in the<br />
consequence variable. The first number in a shaded box indicates the number <strong>of</strong> papers in our database that examine the association between a consequence and<br />
an EQ proxy. The second number in a shaded box (if there is one) indicates the number <strong>of</strong> papers that provide negative evidence (inconsistent with the theory).<br />
Consequence<br />
Persistence and<br />
accrual attributes<br />
Abnormal<br />
accruals<br />
167<br />
Earnings <strong>quality</strong> proxy<br />
Properties <strong>of</strong> <strong>earnings</strong> ERCs<br />
Smoothness<br />
Asymmetric<br />
timeliness/<br />
Timely loss<br />
recognition<br />
Benchmarking<br />
(loss avoidance)<br />
Benchmarking<br />
(small positive<br />
<strong>earnings</strong> surprise)<br />
Investor response<br />
coefficients<br />
External indicators <strong>of</strong><br />
financial reporting <strong>quality</strong><br />
Capital markets Short-window returns 5 6 1 3 2 2<br />
Long-window returns 3 1<br />
Future returns 10/1 6/1 1<br />
Market multiples 3 3<br />
Cost <strong>of</strong> equity capital 3 5/1 4/2 1 1 1 1 3/1 3/1<br />
Debt market 1 1<br />
Other than capital<br />
markets Litigation<br />
2 2 2<br />
Compensation 2 1 1 1<br />
Executive turnover 1 1 2 3<br />
Audit opinions 3/2 1/1<br />
Analyst decisions 1/1 3/1<br />
Real activities 1 1 1 1 1 2/1 1 1<br />
AAERs<br />
Restatements<br />
Internal control<br />
procedures