EARNINGS QUALITY RELATED TO SUSTAINABILITY, RELIABILITY, PERFORMANCE AND EARNINGS MANAGEMENT

Mihalcea Mihaela-Maria and Hada Izabela-Diana
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Mihalcea Mihaela-Maria: 1 DECEMBRIE 1918 UNIVERSITY OF ALBA IULIA, ROMANIA
Hada Izabela-Diana: 1 DECEMBRIE 1918 UNIVERSITY OF ALBA IULIA, ROMANIA

Annals - Economy Series, 2020, vol. 4, 155-162

Abstract: The quality of earnings - this seemingly abstract concept - is, on the contrary, one of practical interest for investors in the decision-making process. Quality gains provide assurances about their persistence, about their lack of fluctuation, about their predictive ability. In this way, investors will make safe decisions. Moreover, quality gains provide confidence that they are not affected by accounting manipulations, that the performance presented is real and can be maintained in the future. The quality of earnings can be assessed by the size of the commitments defined as the difference between profit and cash flow, between operating income and operating cash flow or by the ratio between them. Persistence can be measured by the slope coefficient in a regression of the change in the level of gains. More than persistence, the lack of earnings fluctuation provides a more relevant assessment of their quality, and can be assessed by the residuals of the regression of the change in earnings. Among the explanatory variables of the quality of earnings used in various models are numerous performance rates (return on assets, gross margin, liquidity current ratio, Growth rate in net working capital, return on total capital), stability / growth rates (year-to-year change in return on assets, year-to-year change in long term debt to assets, growth rate in net working capital, growth rate in noncurrent assets, change in receivables versus change in sales). So the quality of earnings includes the lack of variability, the lack of earnings management, performance. Through this, the quality of earnings is the best assurance for investors.

Keywords: earnings quality; earnings management; sustainability; accruals; investors (search for similar items in EconPapers)
Date: 2020
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