Earning Quality

Accounting Theory

Dec 2012

Earnings Quality

Table of Contents

Introduction

1.Properties of earnings

2. Abnormal accruals and modeling the accrual process

2.1 Accruals models

2.2 Studies of abnormal accruals and persistence

2.3 Earnings smoothness

2.4 Asymmetric timeliness and timely loss recognition

2.4.1 Measurement issues

2.4.2 Evidence on timeliness as a proxy for earnings quality

2.5 Target beating

2.5.1 Determinants of target beating

2.5.2 Consequences of target beating

3. Investor responsiveness to earnings

3.1 Direct evidence on ERCs as a proxy for earnings quality

3.2 Indirect evidence on ERCs as a proxy for earnings quality based on determinants

3.3 The relation between ERCs and non-earnings information

4.External indicators of earning misstatement

4.1 Security Exchange Commission and Auditing Enforcement Releases

4.2 Restatements

4.3 Internal Report procedure deficiencies report.

Conclusion

INTRODUCTION

In this paper we look at earnings quality based on 3 categories of earnings:

• Properties of earnings

• Investor responsiveness to earnings and

• External indicators of earnings misstatements.

Properties of earnings include earnings persistence and accruals; earnings smoothness; asymmetric timeliness and timely loss recognition; target beating, in which the distance of earnings from a target is viewed as an indication of earnings management. Investor responsiveness to earnings includes papers that use an earnings response coefficient (ERC) as a proxy for earnings quality and that relate the ERC to another construct such as auditor quality. External indicators of earnings misstatements includes Accounting and Auditing Enforcement Releases (AAERs), restatements, and internal control procedure deficiencies reported under the Sarbanes Oxley Act, all of which are indicators of errors or earnings...