Abstract
Abstract The persistence and predictive ability are extensively requested as desirable attributes of earnings quality in the literature. The paper aims at investigating the persistence and predictive ability of earnings in French and UK companies. The study included a panel data of 1035 firm-year observations for 115 French listed companies from the CAC All-Tradable and 900 firm-year observations for 100 UK listed companies from the FTSE All-Share, during the period of 2011–2019. The research design was based on two equations starting from Sloan (1996) that were estimated using Fixed Effects Method. The study showed that earnings were persistent but they had no predictive ability regarding the future cash flows whether in French or UK companies and that earnings of UK companies were more persistent than those of the French companies. We argue that the persistence of earnings and the inability to predict future cash flows can be evidence of earnings management. The study contributes to the literature about earnings quality by studying earnings persistence and earnings predictive ability together in two different environments. The results require that users must take into consideration the illusory persistence of earnings, auditors must be cautious regarding the manipulation of earnings by managers, and accounting standard setters must review the reporting guidelines of cash flows to enhance their predictability by earnings.
Highlights
For many decades, earnings quality has been considered the pertinent measure of accounting quality since it has a crucial role in resource allocation in stock markets; it is difficult for all parties to ignore that fact (Lyimo, 2014, p. 17; Legenzova, 2016)
Concerning the dispersion, data of French companies are more dispersal than UK companies, and data of the period cash flows from operations (OCFit+1) are more dispersal than current (NIit) and future earnings (NIit+1) in the two cases
Earnings persistence and earnings predictive ability are desirable attributes of earnings quality; they are extensively requested for the purposes of contracting, valuation, and information asymmetry reduction, especially in stock markets
Summary
Earnings quality has been considered the pertinent measure of accounting quality since it has a crucial role in resource allocation in stock markets; it is difficult for all parties to ignore that fact (Lyimo, 2014, p. 17; Legenzova, 2016). Managers seek meeting analysts’ forecasts as a way to maximize the value of their companies for investors or to serve their interests, while analysts are concerned with the perfect measure of earnings quality to maximize the portfolio of investors (Kimouche, 2021). The company’s valuation is often relying on the expectation of future cash flows (Pivorienė, 2017), which requires a high predictive ability of current earnings. Persistence and predictive ability of earnings are the main attributes of earnings quality leading earnings to be a good indicator for future performance of the company Penman & Zhang (2002) consider that the persistence and predictive ability of earnings are good proxies of earnings quality because earnings have high quality when they are sustainable and/or predictor. The persistence and predictive ability of earnings is desirable to reduce risk in assessing company value and contracting (Sun, 2010)
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