ASSESSING THE MEASURES OF QUALITY OF EARNINGS: EVIDENCE FROM INDIA

Abstract

The purpose of this study is to investigate whether there is consistency among the measure of earnings quality. So far, there is no agreed definition of earnings quality in accounting and finance arena. We used secondary data draw from Prowess data base for companies listed in Bombay stock exchange from 2006 to 2012. We employed non-parametric test using spearman rank correlation to investigate the consistency among earnings quality measures. We used five commonly used measures of earnings quality persistence, predictability, smoothness, earnings surprise and accrual quality (Penman, & Zhang 2002; Francis et al. 2004; Abdelghany 2005, Dechow et al. 2010). We find in general there is no completely consistency among the measures of earnings quality. Evidence from this study suggests that analyst, investors and market participants should not use one measure of earnings quality since one measure of earnings quality cannot complement other measure of earnings quality. We therefore request analyst to use more than one measure. In case of inconsistency when more than one measure of earnings quality is used further analysis is inevitable.

 

Keywords: Accrual Quality, Earnings Quality, Persistence, Predictability, Smoothness


Article Review Status: Published

Pages: 17-28 (Download PDF)

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