Earnings Quality

Earnings Quality reviews current research activities around earnings quality. It provides an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research with a focus on capital markets. It examines how the precision of financial information affects the assessment and use of that information by capital market participants. The authors' main focus is on the precision of earnings, which is viewed as a summary indicator of the overall quality of financial reporting. The authors review: earnings quality and place earnings quality in the context of overall capital market information quality; the determinants of earnings quality, broadly separated into intrinsic determinants that derive from business models and operating environments and reporting determinants that derive from the management's implementation decisions in financial reporting process; twelve measures of earnings quality providing examples of research using these measures, and offer views on which measures are preferable in a given context; research design issues and research findings pertaining to the capital market consequences of earnings quality, in particular its association with expected returns (or the cost of capital) and unexpected (abnormal) returns. Earnings Quality is of interest to many participants in the financial reporting process including standard setters, preparers, auditors, regulators, analysts, and financial press commentators. It is of equal interest to accounting educators and researchers.