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


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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    • "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
    Preview · Article · Jan 2010 · Review of Quantitative Finance and Accounting
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    ABSTRACT: The main purpose of the paper is to investigate the market valuation of accounting information in the European banking industry before and after the adoption of IFRS, the latest version of International Accounting Standards. In a value relevance framework, we apply panel methods to a multiplicative interaction model, in which the partial effects of earnings and book value on share prices are conditional on the adoption of IFRS. According to our evidence, the IFRS introduction enhanced the information content of both earnings and book value for more transparent banks. By contrast, less transparent entities did not experience significant increase in the value relevance of book value. KeywordsValue-relevance–Accounting information–IFRS/IAS–Information efficiency
    Full-text · Article · Apr 2010 · Review of Quantitative Finance and Accounting
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    ABSTRACT: This study examines the impact of the mandatory adoption of the 1997 and 2006 Egyptian accounting standards on earnings quality and firm valuation. Extant research finds that IAS-based standards have positive effects on financial statement attributes (e.g., earnings management) and capital market-related variables (e.g., firm valuation) in some countries, and negative or neutral effects in others. Research conducted in this area on emerging markets is scant, and none in Egypt, which has adopted in 1997 an IAS-based standards (later revised twice in 2002 and 2006). Using a sample of Egyptian listed firms around the time of introducing the 1997 and 2006 EAS versions, I find insignificant empirical evidence that earnings management decreases post adoption of each of the EAS versions under investigation. Additionally, I find that firm valuation (Tobin’s q) was significantly negatively affected by both EAS versions under investigation in this study. I attribute these results to the lack of compliance by financial statement preparers, improper regulatory enforcement mechanisms, the poor accounting infrastructure, and the inadequate practitioner training, claimed by prior literature. KeywordsInternational accounting standards–International financial reporting standards–Earnings quality–Tobin’s q –Accruals–Emerging markets–Egypt
    No preview · Article · Feb 2010 · Review of Quantitative Finance and Accounting
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