Article

The effect of earnings quality and country-level institutions on the value relevance of earnings

Review of Quantitative Finance and Accounting 11/2009; 33(4):371-391. DOI: 10.1007/s11156-009-0117-z

ABSTRACT This study investigates the relationship between the value relevance of earnings and earnings quality across countries. We
find that there is a stronger relationship between earnings quality and the value relevance of earnings in countries with
high investor protection than in countries with weak investor protection. We also find that the association between the value
relevance of earnings and earnings quality is higher when a country’s information environment is less opaque. Overall, our
study documents evidence on international differences in the ability of stock prices to capture useful accounting information,
consistent with the notion that the returns-earnings association reflects not only the quality of accounting earnings but
also the informativeness of stock prices.

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Available from: David M. Emanuel, Jul 28, 2015
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    • "Second, disclosure requirements are very similar between the U.S. and Canada (especially, for crosslisted firms). Thus, there is no apparent need to adjust for the relationship between the probability of informed trading and investor protection identified by Brockman and Chung (2008) or to examine differences in the relationship between earnings quality and the value relevance of earnings due to differences in accounting practices and investor protection between the U.S. and Canada (Cahan et al., 2009). The empirically testable implication of these observations can be expressed as the following testable hypothesis: "
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    ABSTRACT: This paper examines informed trading and price discovery for Canadian shares cross-listed on the Toronto Stock Exchange and the main U.S. exchanges. The domestic Canadian market can absorb higher demand for liquidity but offers no trading cost advantage. During earnings non-announcement periods, the intra-market probability of informed trading (PI) is similar on both national markets, and both national markets contribute to price discovery. The magnitude and elapsed time over which trading volumes are increased when earnings are announced are higher in the domestic Canadian market. Around earnings announcements, PI decreases only on the U.S. market and the Canadian market contributes more to price discovery. To infer the fundamental values of the underlying cross-listed firms, market participants should monitor both markets, and intensify their monitoring of the Canadian market during earnings announcement periods. KeywordsCross-listing–Market fragmentation–Information asymmetry–Liquidity–Probability of informed trading–Regime-switching model–Error correction model
    Review of Quantitative Finance and Accounting 01/2010; 36(1):1-31. DOI:10.1007/s11156-010-0169-0
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