Tag Archives: Earnings Quality

Earnings Quality of Firms in the Nigerian Financial Services Sector (Published)

The paper uses panel data spanning from 2011 to 2015 to examine the differential earnings quality of Deposit Money Banks (DMBs) and insurance companies listed on the   Nigerian Stock. We employ two proxies of earnings quality as dependent variables in running logistic  regression and Generalised least square (GLS), all based on random effects, to test the hypothesis that DMBs are likely to exhibit higher earnings quality than insurance companies. We fail to document evidence to support our hypothesis.  We recommend for research employing richer data    set with more proxies of earnings quality.


Keywords: Deposit Money Banks, Earnings Quality, Insurance companies, financial services sector


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


This study follows prior studies on cash – based activities manipulations to investigate total levels of cash – based earnings management relative to the association between cash – based earnings management and audit firm size of companies in Nigeria. First, the study measures the normal level of real activities by focusing on three manipulation schemes namely, manipulation of sales, overproduction, and reduction in discretionary expenses. The normal levels of each type of real activities manipulation were measured as the residual from relevant estimation models. The abnormal CFO, abnormal production costs and abnormal discretionary expenses were computed as the difference between the actual values and the normal levels predicted from the respective models while the composite value of the three variables is the estimate for cash – based earnings management. Based on a sample of 342 companies – year observations from the NSE and applying audit firm size as a measure, comprehensive multivariate analyses were conducted on archival data covering 2006 – 2011. The result showed that audit firm size exerts significant negative relationship with cash – based earnings management of quoted companies in Nigeria. It is suggested that companies in Nigeria should improve their earnings quality only through sales growth and cost control strategies and present distinct reports on earnings quality; company auditors should issue Integrated Audit Quality Assurance Reports based on earnings quality assessments statutorily backed by earnings monitoring of companies in Nigeria; while regulatory agencies should issue authoritative codes of best practice in Nigeria

Keywords: Audit Firm Size, Audit Quality, Cash Flow from Operations., Earnings Management, Earnings Quality

Assessing the Quality Of Alternative Income Measures for IFRS Companies in Europe (Review Completed - Accepted)

This research look into the effectiveness of eleven different earnings measures as: net income, total comprehensive income, gross income, operating income after depreciations, income before income taxes, earnings before preferred dividends, earnings before extraordinary items, earnings before extraordinary items and preferred dividends, earnings before interest and taxes, earnings before interest, taxes, depreciations and amortization and Institutional Brokers‟ Estimate System (I/B/E/S) earnings. We estimate and compare six attributes of each performance measures that are assumed in the literature to enhance the quality of reported earnings, including: value relevance, predictability, persistence, timeliness, conditional conservatism and smoothing. Our main objective is to understand which, in comparative terms, is better quality and to examine the quality of the additional earnings measures beyond the minimum required by International Accounting Standards IAS N° 1. We base our inferences on a sample of 2,655 firms from 25 countries that applied International Financial Reporting Standards regulation (IAS/IFRS) over the time period (2006-2012). We find evidence that I/B/E/S actual reported earnings, disclosed by the Analyst Estimate Tracking Services is significantly more value relevant than the other ten income metrics. We show that EBITDA is of higher quality than the other ten measures in terms of predictability of future cash flow and timeliness. We further find that gross income provides better earnings‟ quality beyond the other ten metrics in terms of predictability of future earnings, persistence and smoothing. We conclude also superior explaining power of EBIT for the ability to reflect quickly bad news about the firm‟s performance conditional conservatism among the ten earnings measures. As a final point, our empirical evidence shows that net income produces better earnings quality properties than total comprehensive income. Overall, our empirical results provide several interesting insights. Our findings lead to the conclusion that there is no single earnings measure that dominates all others. Furthermore, our results confirm that none of IAS N° 1 required earnings as net income and comprehensive income gains in terms of earnings quality properties. Accordingly, we documents that subtotals earnings measures generally tend to be more useful when they include core operating expenses and eliminate more transitory components like EBITDA or IBES metrics. These results should be of some concern to accounting standard setters, as well as regulatory agencies as they give evidence of the lower quality of the IFRS earnings.

Keywords: Alternatives Earnings Measures, Earnings Quality, Financial Statement Presentation, GAAP Earnings, IAS N° 1, IAS/IFRS Regulation, Income Measurement, Non-GAAP Earnings.

Quality Of Net Income Vs Total Comprehensive Income In The Context Of IAS/IFRS Regulation (Review Completed - Accepted)

Worldwide researches in the field of accounting have tried to provide fair and useful financial performance measures for a wide range of users. As well, academics and professionals have established for decade income as the key performance measures in making economic decisions (Ball and Brown, 1968; Beaver, 1968; Lev, 1989). The purpose of this study is to investigate the quality of total comprehensive income TCI relative to net income NI, prepared in accordance with International Financial Reporting Standards IAS/IFRS. Through a data set covering 2,273 firms belonging to 22 countries from Europe, Asia and Australia during (2006-2010), we provide evidence that net income always dominates comprehensive income as a valuation metric. In fact, we find that NI is more value relevant and predicts future operating cash flows and income better than TCI. Also, NI better explain the actual operating cash flows than TCI. Moreover NI is more persistent and timely than TCI. We demonstrate also, that the quality of accruals linked to NI is better than those related to TCI. Though, we find that TCI is less smoothing and more conservative than NI. These results do not support the claim that income measured on a comprehensive basis is a better measure of firm performance than NI. These results raise the questions about the usefulness of mandating TCI in IAS/IFRS regulation. Our findings, therefore, should be of interest to IASB as they provide evidence of the fewer quality of the TCI. Perhaps it is time for the IASB to reconsider other comprehensive income components. The IASB should focus on items included in other comprehensive income to progress the quality of the TCI metric. Our results get evidence else, that net income should be retained as a primary decision-relevant metric as suggested by Goncharov and Hodgson (2011).

Keywords: Earnings Quality, Financial Statement Presentation, IAS/IFRS Regulation, Net Income, Total Comprehensive Income

The relation between disclosure quality and information asymmetry. Empirical evidence from Iran (Review Completed - Accepted)

Information asymmetry and management incentive make important problem in the efficient allocation of resources in a capital market. Improving disclosure quality have crucial role in mitigating these problems. This study examines the relationship between disclosure quality and information asymmetry in TSE. To examine this hypothesis, 125 companies listed in TSE, during 2008 up to 2012 have been studied. The first hypothesis suggests that there is a negative relationship between the quality of corporate disclosure and earnings quality. This result shows that disclose financial information in reliable and timeliness manner decrease information asymmetry in form of earning quality

Keywords: Disclosure Quality, Earnings Quality, Information Asymmetry, Information Environment