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Review of Quantitative Finance and Accounting

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01.11.2009 | Original Research

The effect of earnings quality and country-level institutions on the value relevance of earnings

verfasst von: Steven F. Cahan, David Emanuel, Jerry Sun

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 4/2009

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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.

Vorheriger Artikel Effects of takeover protection on earnings overstatements: evidence from restating firms

Nächster Artikel Oil prices and transport sector returns: an international analysis

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See e.g., Alford et al. (1993), Ali and Hwang (2000), Ball et al. (2000, 2003), Hung (2001), Fan and Wong (2002), Land and Lang (2002), and Bushman and Piotroski (2006).

We use the shareholder protection index from La Porta et al. (1998).

The other eight countries are Belgium, Canada, Hong Kong, Ireland, Japan, Norway, South Africa, and Switzerland.

The seven countries are Hong Kong, Indonesia, Malaysia, Singapore, South Korea, Taiwan and Thailand.

They use the R ² from the market model as a measure of stock price synchronicity, and use alternative proxies for the protection of investor rights: (1) a good government index based on the sum of three country indexes: (a) corruption index, (b) risk of expropriation index, (c) repudiation of contracts by government index; (2) rule of law index; (3) judicial efficiency index; and (4) the origin of legal systems, all from La Porta et al. (1998).

They use the capital market openness measure provided by Edison and Warnock (2002).

They use five opaqueness measures: (1) a survey-based measure from the Global Competitiveness Report, (2) a measure of auditing activity from Bhattacharya et al. (2003), (3) a measure of how many key accounting variables are included in financial statements from La Porta et al. (1998), (4) an opaqueness measure from PricewaterhouseCoopers, and (5) an opaqueness measure based on the diversity of analysts’ forecasts.

The fractional ranking for a firm is the raw rank of the firm divided by the total number of firms within a country to which the firm belongs.

We use at least 7 years of time-series data to run regression (1), (2) and (3) for each firm. Following Ball et al. (2000), the top and bottom percentiles of each variable in these equations are excluded.

The control variables in the regressions are winsorized at 1 and 99%.

We do not test H1 and H2 together because the interaction terms, i.e., INVR × QE and INFOP × QE, are highly correlated (r = 0.875–0.979).

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Titel: The effect of earnings quality and country-level institutions on the value relevance of earnings
verfasst von: Steven F. Cahan
David Emanuel
Jerry Sun
Publikationsdatum: 01.11.2009
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 4/2009
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-009-0117-z

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