The Risk of Earnings Quality Impairment

This paper reviews prior studies that provide an understanding of earnings quality concepts. It presents various definitions of earnings quality and discusses proxies used in empirical literature to measure earnings quality. Prior studies measure earnings quality by using time-series properties of earnings including earnings persistence, predictability, timeliness and volatility; relating accruals to future cash flows, associating earnings with stock market metrics such as stock prices and returns and assessing the level of discretionary accruals. The literature emphasizes that the quality of earnings is very important as the earnings figure is widely used in many contractual agreements and investing decisions.