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.


Available from: David M. Emanuel, May 14, 2015
  • [Show abstract] [Hide abstract]
    ABSTRACT: We examine whether firms have increased their timely loss recognition with the mandatory adoption of International Financial Reporting Standards (IFRS) across Europe since 2005. We estimate firm-specific asymmetric timeliness using the Khan and Watts (2009) C-score, which accounts for size, market-to-book, and leverage. We use firms that voluntarily adopted IFRS before the mandatory adoption date as a control sample to address the effect of unidentified confounding events. We find increased timely loss recognition relative to this control sample only among mandatory IFRS adopters with a higher cost of debt and in countries less dependent on private debt or bank financing. Our results are robust to controls for firm characteristics such as interest coverage, return on assets, earnings volatility, loss, accrual quality, beta, and growth, as well as both industry and country effects. We confirm that corporate finance incentives play a decisive role in determining firms’ timeliness of loss recognition after mandatory IFRS adoption.
    International Review of Financial Analysis 02/2015; 38. DOI:10.1016/j.irfa.2015.02.002
  • [Show abstract] [Hide abstract]
    ABSTRACT: This paper examines the impact of IFRS adoption on the quality of accounting information within the Greek accounting setting. Using a sample of 101 firms listed in the Athens Stock Exchange (ASE) for a period of eight years (2001–2008) we find convincing evidence that the implementation of IFRS contributed to less earnings management, more timely loss recognition and greater value relevance of accounting figures, compared to the local accounting standards. Also, our findings document that audit quality further complements the beneficial impact of IFRS since those companies that are audited by Big-5 audit firms exhibit higher levels of accounting quality. Our findings are robust in regard to different model specifications and after controlling for firm-specific effects like size, risk, profitability and growth opportunities.
    Advances in Accounting 11/2013; 29(1):108–123. DOI:10.1016/j.adiac.2013.01.002
  • [Show abstract] [Hide abstract]
    ABSTRACT: The purpose of this paper is to investigate the direct link between firm fundamentals and stock prices in a set of emerging Asian stock markets using firm-level panel data. In doing so, we explore the relationship between firm-specific variations in stock returns and firm fundamentals in the context of a simple present value framework. We find that alternative proxies of variation in firm fundamentals—albeit at differing degrees—explain a significant part of firm-specific return variation in a majority of emerging markets in Asia. Findings are robust to the influence of other factors known to affect stock return volatility (e.g. firm size, stock turnover, and leverage). Overall results suggest that stock prices in a majority of the Asian emerging markets contain a significant amount of firm-specific fundamental information and are, therefore, not as murky as commonly thought.
    Review of Quantitative Finance and Accounting 10/2012; DOI:10.1007/s11156-012-0316-x