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.

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

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1004&context=accounting_papers

Historically, management theory has ignored the constraints imposed by the biophysical (natural) environment. Building upon resource-based theory, this article attempts to fill this void by proposing a natural-resource-based view of the firm—a theory of competitive advantage based upon the firm's relationship to the natural environment. It is composed of three interconnected strategies: pollution prevention, product stewardship, and sustainable development. Propositions are advanced for each of these strategies regarding key resource requirements and their contributions to sustained competitive advantage.

A natural resource-based view of the firm

This paper explains the size and value "anomalies" in stock returns using an economically motivated two-beta model. We break the beta of a stock with the market portfolio into two components, one reflecting news about the market's future cash flows and one reflecting news about the market's discount rates. Intertemporal asset pricing theory suggests that the former should have a higher price of risk; thus beta, like cholesterol, comes in "bad" and "good" varieties. Empirically, we find that value stocks and small stocks have considerably higher cash-flow betas than growth stocks and large stocks, and this can explain their higher average returns. The poor performance of the capital asset pricing model (CAPM) since 1963 is explained by the fact that growth stocks and high-past-beta stocks have predominantly good betas with low risk prices.

Bad Beta, Good Beta

June 2011 IAASB Discussion 1. At the June 2011 meeting, the IAASB considered a first draft of the Audit Quality Framework (\" Framework \") paper. The IAASB expressed strong support for a holistic approach to the development of the proposed Framework. Amongst other matters, suggestions were made for the paper to give greater recognition to the dynamism of audit quality (AQ), to recognize the influences of technology and industry circumstances as important additional contextual factors, to further consider the linkages with efficiency and cost, and to reconsider the AQ schematic so that it more effectively articulates the various elements of the Framework and the Framework's dynamism. 2. On the basis of this input and as agreed by the IAASB, the Task Force developed a revised draft of the Framework paper (the \" CAG Draft \" − see Agenda Item 6-F) for purposes of soliciting initial reactions and input from specific stakeholder groups in Q3-Q4 2011. 3. Key highlights of the discussions with stakeholders on the CAG Draft are set out below. representatives of the Task Force met six very experienced academics (four from the U.S., one from Australia, and one from Canada) in Denver on August 7 th to discuss the CAG draft. The meeting was arranged by Board member Bill Kinney, who was one of the participants. The academics seemed genuinely interested in the project and made a number of constructive suggestions as to how the Framework might be improved. A number said they struggled with understanding the current model. An alternative structure was suggested which is more consistent with the way the topic has been treated in a number of recent studies. 1 September 2011 IAASB CAG Meeting 5. Some CAG representatives welcomed the project and were broadly supportive of the CAG draft, with some commenting that it was well balanced and thoughtful. 6. One CAG representative, however, took a different position and criticized the paper for dealing with systemic issues rather than focusing on audit quality at the engagement level. A number of other CAG representatives agreed that poor contextual factors such as weak corporate governance cannot be used as an excuse for a poor quality audit. Several thought that the Framework should focus more on factors that auditors can control. 7. Some CAG representatives expressed concern that too much emphasis was placed on efficiency in the proposed Framework and were of the view that more of …

A Framework for Understanding and Researching Audit Quality

We estimate a firm-year measure of accounting conservatism, examine its empirical properties as a metric, and illustrate applications by testing new hypotheses that shed further light on the nature and effects of conservatism. The results are consistent with the measure, C_Score, capturing variation in conservatism and also predicting asymmetric earnings timeliness at horizons of up to three years ahead. Cross-sectional hypothesis tests suggest firms with longer investment cycles, higher idiosyncratic uncertainty and higher information asymmetry have higher accounting conservatism. Event studies suggest increased conservatism is a response to increases in information asymmetry and idiosyncratic uncertainty.

Estimation and Empirical Properties of a Firm-Year Measure of Accounting Conservatism

http://dspace.mit.edu/bitstream/handle/1721.1/52696/KhanWatts_Estimation%20and%20Empirical.PDF?sequence=1

Estimation and empirical properties of a firm-year measure of accounting conservatism

Using newly-available materiality classifications of sustainability topics, we develop a novel dataset by hand-mapping sustainability investments classified as material for each industry into firm-specific sustainability ratings. This allows us to present new evidence on the value implications of sustainability investments. Using both calendar-time portfolio stock return regressions and firm-level panel regressions we find that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues. In contrast, firms with good ratings on immaterial sustainability issues do not significantly outperform firms with poor ratings on the same issues. These results are confirmed when we analyze future changes in accounting performance. The results have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.

/pdf/corporate-sustainability-first-evidence-on-materiality-4c5ib7kss6.pdf

Corporate Sustainability: First Evidence on Materiality

Using newly available materiality classifications of sustainability topics, we develop a novel dataset by hand-mapping sustainability investments classified as material for each industry ...

/pdf/corporate-sustainability-first-evidence-on-materiality-22p5nkn78b.pdf

This paper proposes a risk-based explanation for the accrual anomaly. Risk is measured using a four-factor model motivated by the Intertemporal Capital Asset Pricing Model. Tests of the model suggest that a considerable portion of the cross-sectional variation in average returns to high and low accrual firms is explained by risk. The four-factor model also performs better than some other widely used models in pricing a number of different hedge portfolios.

Mozaffar Khan

Papers

Estimation and Empirical Properties of a Firm-Year Measure of Accounting Conservatism

Estimation and empirical properties of a firm-year measure of accounting conservatism

Corporate Sustainability: First Evidence on Materiality

Corporate Sustainability: First Evidence on Materiality

Are Accruals Mispriced? Evidence from Tests of an Intertemporal Capital Asset Pricing Model