The quality of accruals and earnings - and the market pricing of earnings quality

Finn Schøler ()
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Finn Schøler: Department of Business Studies, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark, http://www.asb.dk/staff/bs/fsc.aspx?page=%7B803EFF10-69F7-4C0F-AEE3-F7F410E4B6F2%7D

No R-2004-01, Financial Reporting Research Group Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: This study focuses on earnings quality by investigating the quality of accruals using the approach

introduced by Dechow & Dichev (2002). One essential element is the role of accrual estimation errors,

and another is whether the equity market impounds information about the quality of earnings. The basic

assumption is that the quality of accruals and earnings is decreasing as the magnitude of estimation

errors in the accruals is increasing. The paper contributes to the literature on accrual (and earnings)

quality by investigating not only the quality of aggregated accruals but also the quality of some more

specific company key accruals, where especially the two balance sheet accounts, inventory and accounts

receivable, are of interest. This is documented and discussed by relating empirical measures of the

quality of the different specific key-accruals as well as aggregated accruals quality vs. observable firm

characteristics (e.g. volatility of accruals and earnings, etc.). Further, since an analysis of this type in

general can be said to be somewhat mechanical, it is also investigated whether and how, the equity

market (e.g. observable earnings-price-ratios) impounds information about the quality of the different

accruals and earnings.

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Pages: 21 pages
Date: 2006-04-25
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