Earnings quality on the street

• 成果类型: Article
• 署名作者: Khan, Urooj; Peddireddy, Venkat; Rajgopal, Shiva
• 署名单位: University of Texas System; University of Texas Austin; China Europe International Business School; Columbia University
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12975
• 发表日期: 2024
• 页码: 2290-2324
• 关键词: financial statement information; Fundamental analysis; corporate governance; accounting anomalies; returns; fees; persistence; management; winners; TENURE

摘要

We develop a composite firm-year earnings quality score (EQSCORE) that uses signals based on fundamental analysis. We obtain a proprietary data set of 613 reports about aggressive reporting practices over 2004-2009 for 230 unique firms from a research firm (RF). From these reports, we identify red flags of poor earnings quality relating to (1) sales quality, (2) margin quality, (3) cash flow quality, (4) corporate governance, (5) audit, and (6) others. We construct the EQSCORE using 51 signals employed by the RF and a novel approach that imitates the RF's process for discovering earnings quality. The EQSCORE outperforms existing composite models of earnings quality in identifying accounting and auditing enforcement releases and restated firm-years and predicts future stock returns. The corporate governance-related and audit-related red flags included in the EQSCORE complement accounting-based red flags and enhance the ability of the EQSCORE to identify firms with poor earnings quality.