Earnings quality and earnings management springerlink. Each author name for a columbia business school faculty member is linked to a faculty research page, which lists additional publications by that faculty member. Accounting conservatism, the quality of earnings, and stock returns created date. Pdf accounting conservatism, the quality of earnings, and stock. Moreover, these measures also forecast stock returns indicating that investors do not appreciate how conservatism and changes in investment combine to raise questions about the quality of reported earnings. Accounting conservatism, the quality of earnings, and stock. Identify the five key financial ratios that fundamental analysts use to evaluate walmarts wmt financial position to determine if it is a good buy.
Conservatism yields lower earnings, it is said, and so prima facie these conservative earnings are higher quality. To provide additional insight into the relation between the two measures of conservatism, earnings opacity and future spcr, we. Earnings management em and earnings quality eq can be considered two related challenging issues in financial reporting as em is an aspect influencing eq. Pdf accounting conservatism, the quality of earnings. Accounting conservatism quality of accounting information. Earnings quality and stock returns 1043 counting, since investors apparently cannot unravel the valuation effect of reported earnings in a timely manner under current reporting standards. The purpose research is to examine other variables that also affect the relationship between conservatism and earnings quality. Accounting conservatism is a branch of accounting that requires a high degree of verification before making a legal claim to any profit as it requires recognition of. Accounting conservatism quality of accounting information and crash risk of stock prices. While conservatism may lead to a reduction of the current periods. Penman columbia university xiaojun zhang university of california, berkeley abstract. Quality of earnings questions arise when firms that practice conservative accounting change the level of their investment in net operating assets.
Reported earnings quality under conservative accounting and. The quality index forecasts changes, from current levels, of future core return on net operating assets, so ex ante is an analysis tool to discover earnings of low. When a firm practices conservative accounting, changes in the amount of its investments can affect the quality of its earnings. Jun zhang 2002 accounting conservatism, the quality of earnings, and stock returns. Accounting conservatism, the quality of earnings, and. Managers can make discretionary accounting choices that are regarded as a practice of either efficient communication of private information or distorting disclosure. Ret i, t is the stock return for the period starting nine months before the fiscal yearend and ending three months after. We find that these measures forecast differences in future return on net operating assets relative to current return on net operating assets. Good corporate governance is a set of mechanisms that can protect. Accounting conservatism, the quality of earnings, and stock returns stephen h. Accounting conservatism, the quality of earnings, and stock returns it is often claimed that the practice of conservatism in accounting produces higher quality earnings.
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