http://www.course.sdu.edu.cn/G2S/eWebEditor/uploadfile/20130217204534275.pdf

Earnings management through real activities manipulation

Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.

/pdf/understanding-earnings-quality-a-review-of-the-proxies-their-1r9rjtuq8l.pdf

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Earnings Management and Investor Protection: An International Comparison

We investigate the role of information in affecting a firm's cost of capital. Using a multi-asset rational expectations model, we show that differences in the composition of information between public and private information affect the cost of capital, with investors demanding a higher return to hold stocks with greater private information. This higher return arises because informed investors are better able to shift their portfolio weights to incorporate new information, and uninformed investors are thus disadvantaged. The model demonstrates how in equilibrium the quantity and quality of information affect asset prices, resulting in cross-sectional differences in firms' required returns. We show how a firm can influence its cost of capital by choosing features like accounting treatments, financial analyst coverage, and market microstructure.

Information and the Cost of Capital

Earnings quality in uk private firms: comparative loss recognition timeliness

We investigate the role of accrual accounting in the asymmetrically timely recognition (incorporation in reported earnings) of gains and losses. Timely recognition requires accruals when it precedes complete realization of the gains and losses in cash. We show that nonlinear accruals models incorporating the asymmetry in gain and loss recognition (timelier loss recognition, or conditional conservatism) offer a substantial specification improvement, explaining substantially more variation in accruals than equivalent linear specifications. Conversely, conventional linear accruals models, by omitting the loss recognition asymmetry, exhibit substantial attenuation bias and offer a comparatively poor specification of the accounting accrual process. Linear specifications also understate the ability of current earnings to predict future cash flows. These findings have implications for our understanding of accrual accounting and conservatism, as well as for researchers estimating discretionary accruals, earnings management, and earnings quality.

The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition

In recent years there has been a dramatic growth in academic interest in the predictability of asset returns based on past history. A growing number of researchers argue that time-series patterns in returns are due to investor irrationality, and thus can be translated into abnormal profits. Continuation of short-term returns or momentum is one such pattern that has defied any rational explanation, and is at odds with market efficiency. This paper argues that profits to momentum strategies are a result of persistent differences in conditionally expected returns, and are consistent with time-varying expected returns. Standard macroeconomic variables are able to predict momentum payoffs, and these payoffs disappear once returns are adjusted for variations in expected returns.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID243807_code000927500.pdf?abstractid=243807

Momentum, Business Cycle and Time Varying Expected Returns

We investigate the role of accrual accounting in the asymmetrically timely recognition of unrealized gains and losses (i.e., prior to the actual realization of those losses in cash). This role of accrual accounting has not been directly recognized in the literature. We show that non-linear accruals models are a substantial specification improvement, explaining up to three times the amount of variation in accruals as conventional linear specifications such as Jones (1991). Conversely, we conclude that conventional linear accruals models, by omitting the role of accruals in asymmetrically timely loss recognition, offer a comparatively poor specification of the accounting accrual process. We also conclude that linear specifications of the relation between earnings and future cash flows, ignoring the implications of asymmetrically timely loss recognition (conditional conservatism), substantially understate the ability of current earnings to predict future cash flows. These findings have important implications for our understanding of accrual accounting, and for researchers using estimates of discretionary accruals, earnings management and earnings quality from misspecified linear accruals models.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID649681_code154790.pdf?abstractid=649681&type=2

A growing number of researchers argue that time-series patterns in returns are due to investor irrationality and thus can be translated into abnormal profits. Continuation of short-term returns or momentum is one such pattern that has defied any rational explanation and is at odds with market efficiency. This paper shows that profits to momentum strategies can be explained by a set of lagged macroeconomic variables and payoffs to momentum strategies disappear once stock returns are adjusted for their predictability based on these macroeconomic variables. Our results provide a possible role for time-varying expected returns as an explanation for momentum payoffs. THIS PAPER EXAMINES THE RELATIVE importance of common factors and firmspecific information in explaining the profitability of momentum-based trading strategies, first documented by Jegadeesh and Titman ~1993!. The profitability of momentum strategies has been particularly intriguing, as it remains the only CAPM-related anomaly unexplained by the Fama‐French three-factor model ~Fama and French ~1996!!. Jegadeesh and Titman ~2001! show that profits to momentum strategies continued in the 1990s, suggesting that their initial results were not due to data mining. Furthermore, the robustness of this strategy has been confirmed using data from stock markets other than the United States, where the profitability of this strategy was initially identified. Rouwenhorst ~1998! finds momentum payoffs to be significantly positive in 12 other countries that were examined in his study. Also, Chan, Jegadeesh, and Lakonishok ~1996! show that momentum strategies based on stock prices are distinct and separate from strategies based on earnings momentum. Even though investors underreact to earnings news, price momentum is not subsumed by momentum in earnings.

https://www.jstor.org/stable/pdfplus/2697765.pdf

Lakshmanan Shivakumar

Papers

Earnings quality in uk private firms: comparative loss recognition timeliness

The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition

Momentum, Business Cycle and Time Varying Expected Returns

The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition

Momentum, Business Cycle, and Time-varying Expected Returns