Accounting Seminar（2014-04）

Topic：Accounting Standards, Earnings Management,

and Earnings Quality

Speaker: Alfred Wagenhofer, University of Graz

Time:: Friday,11 April,09:30-11:00am

Location:Room 217, Guanghua Building 2

Organizer:Department of Accounting,MPAcc GSM, PKU

Abstract：

This paper examines how the characteristics of accounting systems and management incentives interact and collectively determine financial reporting quality. We develop a rational expectations equilibrium model that features a steady-state firm with investments, financial and non-financial information, and earnings management. Our measure of earnings quality is the equilibrium information content of reported earnings. We study effects on earnings quality by varying the accruals, the precision of base earnings and private non-financial information, the cost of earnings management, and operating risk. The analysis confirms some intuitive results, such as that earnings quality increases in the precision of earnings and non-financial information. However, we also find counter-intuitive results, such as that an accounting standard that unambiguously provides more information early can reduce earnings quality. Since the equilibrium market reaction is akin to value relevance measures, we study how these measures trace the changes in earnings quality. We show that the earnings response coefficient is more closely related to earnings quality than the correlation of a price-earnings regression.

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