Journal of Commerce and Accounting Research

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Earnings Quality and Firm’s Market Risk:An Empirical Study in Indian Context


Affiliations
1 University Business School, Panjab University, Chandigarh, India
     

   Subscribe/Renew Journal


Financial statements are one of the most important sources of information which aid stakeholders in taking various economic decisions. Accounting measures like earnings present in these statements assist in decision-making. However, this requires high quality of earnings. It has an impact on the firm’s market risk which further influences investment decision of the investors as well as the cost of raising funds by the firms. The present study addresses this issue and attempts to investigate the impact of earnings quality (EAQ) on market risk (SMR) of companies listed on the S&P BSE 100 Index for the period 2013-14 to 2017-18. A panel data analysis revealed that EAQ has a significant negative impact on firm excess returns (RRf). However, EAQ is not significantly related to firm’s SMR and hence EAQ doesn’t interact with market excess returns (MTRf) for affecting the RRf. Among control variables, only firm size is found to have a significant and negative impact on RRf as well as SMR. This study contributes to the literature by exploring the EAQ-SMR relationship in Indian context since the empirical evidence on other economies cannot be applied to India.

Keywords

CAPM, Discretionary Accruals, Earnings Quality, Market Risk, India.
Subscription Login to verify subscription
User
Notifications
Font Size


  • Abdullah, S. N. (2006). Board Composition, Audit Committee and Timeliness of Corporate Financial Reports in Malaysia. Corporate Ownership and Control, 4(2), 33-45.

  • Amir, E., Harris, T. S., & Venuti, E. K. (1993). A Comparison of the Value-Relevance of U.S. Versus Non-U.S. GAAP Accounting Measures Using Form 20-F Reconciliations. Journal of Accounting Research, 31, 230-264.

  • Ashbaugh-Skaife, H., Collins, D. W., Kinney, Jr., W. R., & LaFond, R. (2009). The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity. Journal of Accounting Research, 47(1), 1-43.

  • Asri, M., & Habbe, A. H. (2017). Accounting Conservatism and Earning Quality. Retrieved from SSRN: doi:10.2139/ssrn.3000190

  • Barragato, C. A., & Markelevich, A. (2008). Earnings quality following corporate acquisitions. Managerial Finance, 34(5), 304-315.

  • Barry, C. B., & Brown, S. J. (1985). Differential information and security market equilibrium. The Journal of Financial and Quantitative Analysis, 20(4), 407-422.

  • Beekes, W., Pope, P., & Young, S. (2004). The link between earnings timeliness, earnings conservatism and board composition: Evidence from the UK. Corporate Governance, 12(1), 47-59.

  • Beisland, L. A. (2009). A review of the value relevance literature. The Open Business Journal, 2(1), 7-27.

  • Bhattacharya, N., Desai, H., & Venkataraman, K. (2012). Does earnings quality affect information asymmetry? Evidence from trading costs. Contemporary Accounting Research, 30(2), 482-516.

  • Bhattacharya, N., Ecker, F., Olsson, P. M., & Schipper, K. (2012). Direct and mediated associations among earnings quality, information asymmetry, and the cost of equity. The Accounting Review, 87(2), 449-482.

  • Carmo, C. R., Moreira, J. A., & Miranda, M. C. (2016). Earnings quality and cost of debt: evidence from Portuguese private companies. Journal of Financial Reporting and Accounting, 14(2), 178-197.

  • Chen, C., Huang, A. G., & Jha, R. (2012). Idiosyncratic return volatility and the information quality underlying managerial discretion. Journal of Financial and Quantitative Analysis, 47(4), 873-899.

  • Chen, C., Lin, C., & Lin, Y. (2008). Audit partner tenure, audit firm tenure, and discretionary accruals: does long auditor tenure impair earnings quality? Contemporary Accounting Research, 25(2), 415-445.

  • Coles, J. L., Loewenstein, U., & Suay, J. (1995). On Equilibrium Pricing under Parameter Uncertainty. The Journal of Financial and Quantitative Analysis, 30(3), 347-364.

  • DeAngelo, L. E. (1986). Accounting Numbers as Market Valuation Substitutes: A Study of Management Buyouts of Public Stockholders. The Accounting Review, 61(3), 400-420.

  • Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2-3), 344-401.

  • Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance. Journal of Accounting and Economics, 18(1), 3-42.

  • Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35-59.

  • Dechow, P. M., & Schrand, C. M. (2004). Earnings quality. Retrieved from https://www.cfapubs.org/doi/pdf/10.2470/rf.v2004.n3.3927

  • Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.

  • Diamond, D. W., & Verrecchia, R. E. (1991). Disclosure, liquidity, and the cost of capital. The Journal of Finance, 46(4), 1325-1359.

  • Domingues, A., Cerqueira, A., & Brandão, E. (2016). Idiosyncratic volatility and earnings quality: evidence from United Kingdom, Working Paper 579. Retrieved from http://wps.fep.up.pt/wps/wp579.pdf

  • Easley, D., & O’hara, M. (2004). Information and the cost of capital. The Journal of Finance, 59(4), 1553-1583.

  • Epstein, L. G., & Schneider, M. (2008). Ambiguity, information quality, and asset pricing. The Journal of Finance, 63(1), 197-228.

  • Farhan, M., & Sharif, S. (2015). Impact of Firm Size on Stock Returns at Karachi Stock Exchange. Retrieved from SSRN: doi:10.2139/ssrn.2605460

  • Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2004). Costs of equity and earnings attributes. The Accounting Review, 79(4), 967-1010.

  • Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The market pricing of accruals quality. Journal of Accounting and Economics, 39(2), 295-327.

  • Francis, J., Nanda, D., & Olsson, P. (2008). Voluntary disclosure, earnings quality, and cost of capital. Journal of Accounting Research, 46(1), 53-99.

  • Gaio, C., & Raposo, C. (2011). Earnings quality and firm valuation: International evidence*. Accounting & Finance, 51(2), 467-499.

  • Givoly, D., Hayn, C. K., & Katz, S. P. (2010). Does public ownership of equity improve earnings quality? The Accounting Review, 85(1), 195-225.

  • Hakim, F., Triki, F., & Omri, A. (2008). Earnings quality and equity liquidity: Evidence from Tunisia. International Journal of Managerial and Financial Accounting, 1(2), 147-165.

  • Holthausen, R. W., & Watts, R. L. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics, 31(1-3), 3-75.

  • Hsu, M., & Yu, J. (2015). The influence of earnings quality and liquidity on the cost of equity. International Business Research, 8(4), 194-209.

  • Jenkins, D. S., Kane, G. D., & Velury, U. (2006). Earnings quality decline and the effect of industry specialist auditors: An analysis of the late 1990s. Journal of Accounting and Public Policy, 25(1), 71-90.

  • Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228.

  • Kamarudin, K. A., & Ismail, W. A. (2014). The risk of earnings quality impairment. Procedia - Social and Behavioral Sciences, 145, 226-236.

  • Kim, D., & Qi, Y. (2010). Accruals quality, stock returns, and macroeconomic conditions. The Accounting Review, 85(3), 937-978.

  • Kim, Y., Park, M. S., & Wier, B. (2012). Is earnings quality associated with corporate social responsibility? The Accounting Review, 87(3), 761-796.

  • Lambert, R., Leuz, C., & Verrecchia, R. E. (2007). Accounting information, disclosure, and the cost of capital. Journal of Accounting Research, 45(2), 385-420.

  • Latif, K., Bhatti, A. A., & Raheman, A. (2017). Earnings quality: A missing link between corporate governance and firm value. Business & Economic Review, 9(2), 255-279.

  • Lin, J. W., Li, J. F., & Yang, J. S. (2006). The effect of audit committee performance on earnings quality. Managerial Auditing Journal, 21(9), 921-933.

  • Ma, M. S. (2017). Economic links and the spillover effect of earnings quality on market risk. The Accounting Review, 92(6), 213-245.

  • Ma, S., & Ma, L. (2017). The association of earnings quality with corporate performance. Pacific Accounting Review, 29(3), 397-422.

  • Masud, M. H., Anees, F., & Ahmed, H. (2017). Impact of corporate diversification on earnings management. Journal of Indian Business Research, 9(2), 82-106.

  • Narayanaswamy, R. (2). Political connections and earnings quality: Evidence from India. Working Paper 433. Retrieved from https://iimb.ac.in/research/sites/default/files/WP%20No.%20433.pdf

  • Ng, J. (2011). The effect of information quality on liquidity risk. Journal of Accounting and Economics, 52(2-3), 126-143.

  • Ogneva, M., Subramanyam, K. R., & Raghunandan, K. (2007). Internal control weakness and cost of equity: Evidence from SOX Section 404 disclosures. The Accounting Review, 82(5), 1255-1297.

  • Penman, S. H., & Zhang, X. (2002). Accounting conservatism, the quality of earnings, and stock returns. The Accounting Review, 77(2), 237-264.

  • Perotti, P., & Wagenhofer, A. (2014). Earnings quality measures and excess returns. Journal of Business Finance & Accounting, 41(5-6), 545-571.

  • Rajgopal, S., & Venkatachalam, M. (2008). Financial reporting quality and idiosyncratic Return volatility over the last four decades. Retrieved from SSRN: doi:10.2139/ssrn.650081

  • Rani, M. (2011). The Effects of Audit Committee Characteristics on the Value Relevance of Accounting Information-Evidence from New Zealand (Master’s thesis, Auckland University of Technology, Australia).

  • Richardson, S. (2003). Earnings quality and short sellers. Accounting Horizons, 17(s-1), 49-61.

  • Richardson, S. A., Sloan, R. G., Soliman, M. T., & Tuna, İ. (2005). Accrual reliability, earnings persistence and stock prices. Journal of Accounting and Economics, 39(3), 437-485.

  • Schipper, K., & Vincent, L. (2003). Earnings quality. Accounting Horizons, 17(s-1), 97-110.

  • Shalaei, S. K., & Hashemi, H. A. (2017). Studying the impact of accruals quality and market risk premium on stock return excess using fama-french three factor model. Journal of Politics and Law, 10(2), 114-121.

  • Srivastava, A. (2014). Why have measures of earnings quality changed over time? Journal of Accounting and Economics, 57(2-3), 196-217.

  • Yee, K. K. (2006). Earnings quality and the equity risk premium: A benchmark model. Contemporary Accounting Research, 23(3), 833-877.


Abstract Views: 236

PDF Views: 1




  • Earnings Quality and Firm’s Market Risk:An Empirical Study in Indian Context

Abstract Views: 236  |  PDF Views: 1

Authors

Chhavi Jatana
University Business School, Panjab University, Chandigarh, India

Abstract


Financial statements are one of the most important sources of information which aid stakeholders in taking various economic decisions. Accounting measures like earnings present in these statements assist in decision-making. However, this requires high quality of earnings. It has an impact on the firm’s market risk which further influences investment decision of the investors as well as the cost of raising funds by the firms. The present study addresses this issue and attempts to investigate the impact of earnings quality (EAQ) on market risk (SMR) of companies listed on the S&P BSE 100 Index for the period 2013-14 to 2017-18. A panel data analysis revealed that EAQ has a significant negative impact on firm excess returns (RRf). However, EAQ is not significantly related to firm’s SMR and hence EAQ doesn’t interact with market excess returns (MTRf) for affecting the RRf. Among control variables, only firm size is found to have a significant and negative impact on RRf as well as SMR. This study contributes to the literature by exploring the EAQ-SMR relationship in Indian context since the empirical evidence on other economies cannot be applied to India.

Keywords


CAPM, Discretionary Accruals, Earnings Quality, Market Risk, India.

References