Earnings quality
By: Jennifer Francis, Per Osson, Katherine Schipper
Contributors: Olsson, Per; Schipper, Katherine
Series: Foundations and trends in accounting -- vol. 1, issue 4; Foundations and trends in accounting -- 1:4.
Publisher: Now
Published: 2008
Place of publication: Boston
Language: eng
Format: [electronic resource] /
Number of pages: 85
ISBN-13: 9781601981158; 9781601981141
Subjects: Corporations; Financial statements; Financial; BUSINESS & ECONOMICS; Accounting
Description: This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
Notes: Includes bibliographical references (p. 75-85).

Description based on print version record.
Table of contents: title: Abstract; title: 1. Introduction; title: 2. Earnings quality as a component of information quality in the capital markets; title: 2.1. Quality as an attribute of information in the capital markets; title: 2.2. Financial reporting quality; title: 2.3. Earnings quality as the summary indicator of financial reporting quality; title: 3. Determinants of earnings quality; title: 3.1. Separating innate and discretionary (reporting) sources of earnings quality; title: 3.2. Reporting (discretionary) determinants of earnings quality; title: 4. Measures of earnings quality; title: 5. Earnings quality and market outcomes; title: 5.1. Market outcomes; title: 5.2. Earnings quality and expected returns; title: 5.3. Earnings quality and abnormal return; title: 5.4. Earnings quality and other market outcomes; title: 6. Concluding remarks; title: Acknowledgements; title: References; title: Updates.