Does the earnings quality matter? Evidence from a quasi-experimental setting

Giulia Baschieri, Andrea Carosi and Stefano Mengoli

Finance Research Letters, 2016, vol. 19, issue C, 146-157

Abstract: Investor preference for local stocks provides a quasi-experimental setting to investigate whether the market rewards firms that comply with generally accepted accounting principles. We show firms with low earnings quality trade at a premium compared to firms in compliance with accounting principles; the difference in values is greater when the role of local investor over-trading is stronger in stock price-formation, in other words for the more isolated firms. The value of the information not conveyed to the market through accounting disclosure accounts for 30% of the market-to-book. Results are robust to earnings quality definition, and show while non-local investors are sensitive to the quality of accounting information, local and better-informed investors are not. Overall, accounting quality matters.

Keywords: Earnings quality; Accounting information; Local Home Bias (search for similar items in EconPapers)
JEL-codes: G11 G12 M41 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:19:y:2016:i:c:p:146-157

DOI: 10.1016/j.frl.2016.07.006

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