Higher Earnings Quality Research Articles

Capitalizing on Diversity: The Impact of Board Gender Diversity on the Value of Excess Cash

This paper provides novel and comprehensive evidence regarding the impact of board gender diversity on the valuation of excess cash in companies. By analyzing a robust dataset of publicly listed firms in France from 2005 to 2017, the study finds that companies with a higher representation of women on their boards tend to significantly increase the value attributed to their excess cash reserves. The results suggest that investors perceive these companies as more capable of managing their cash efficiently, leading to a higher valuation. This perception likely stems from the belief that diverse boards contribute to better decision-making processes, which in turn enhances the effectiveness of cash utilization. Furthermore, the study uncovers that the positive relationship between board gender diversity and the valuation of excess cash is even more pronounced in firms that demonstrate high earnings quality. This finding underscores the importance of a transparent and reliable informational environment in strengthening the link between gender diversity and the efficient use of corporate resources. The research contributes to the broader corporate governance literature by emphasizing the critical role of board gender diversity in not only promoting effective cash management but also in increasing overall firm value through improved investor confidence and resource allocation strategies.

The Disclosure Tone, Earnings Management, Earnings Quality: Evidence Found in Indonesia Listed Manufacturing Industry

This study examined the influence of earnings management (EM) and earnings quality (EQ) on the disclosure tone of an annual report. NVIVO’s coding AI measures the DT (Disclosure Tone) through automated text analysis. The sample used was 61 of Indonesia’s listed manufacturing companies from 2017 to 2021. The balanced panel data was used and executed by a weighted panel least square. The results prove that EM is essential for DT, while EQ is insignificant for DT. The higher EQ indicates the high asymmetric information from management to the stakeholders, which leads the company to disclose a more positive tone. However, the negative tone is also improving with a higher EQ. These results imply that when the company has higher EM, it tries to balance the tone of its annual report in order to gain the trust of stakeholders, this is beneficial for analysts, investors, and regulators when collecting information from annual reports. Future studies can extend this framework to other types of industries since each industry has specific characteristics in giving the tone in their reports. Besides, future studies can also focus on the tone of the sustainability report or integrated report in other countries.
 Keywords: earnings management, earnings quality, disclosure tone, manufacturing industry

How Qualified is The Company’s Earning Quality: a Study of The 100 Most Liquid Indonesian Companies

Investor behavior can be reflected in the market price. Market price movement have strong correlation with market perspective about company earnings. Market does not always positively react to high earnings information, but should be high quality of earnings. High quality earnings can reflect the company's actual financial condition, which useful for investment decision making for investors, and determine business strategies for companies. The aim of this study is to obtain empirical evidence regarding the effect of earnings persistence, liquidity, growth opportunity, profitability, and capital structure toward earnings quality. The objects in this study are companies included in the Kompas100 Index, index that ranks 100 companies with the highest liquidity, consecutively during 2018-2020. Secondary data used was obtaining from financial reports and analyzed using multiple linear regression equations. This research found that companies which can generate profit from their main operation, not from foreign exchange or other income supposed to be companies with high quality earnings. Moreover, business strategic that such as market expansion, differentiation even though in the early stage judge can improve quality of earnings.

Mitigating overinvestment in Japanese zombie firms: the role of foreign ownership and earnings quality

PurposeThis study investigates the relationship between foreign ownership, earnings quality and overinvestment in Japanese zombie firms.Design/methodology/approachThe study makes use of data from Japanese firms listed on the first section of the Tokyo Stock Exchange from 2009 to 2019. The study employs logistic and multinomial logistic models to test whether the overinvestment behavior of zombie firms is mitigated by foreign shareholdings and earnings quality.FindingsThe results show that (1) zombie firms tend to overinvest; (2) an increase in foreign ownership mitigates the overinvestment of zombie firms and (3) the mitigation of zombie firms' overinvestment by foreign ownership is stronger with higher earnings quality.Originality/valueThis study extends the discussion of earnings quality and investment efficiency to the zombie firm setting. Previous studies in accounting suggest that high earnings quality enhances firms' investment efficiency. The findings suggest that both a change in ownership structure and high-quality accounting information are necessary to mitigate the inefficiency of zombie firms.

Does Ownership Structure and Financial Health Affect Firm’s Earnings Quality? Evidence from Emerging Economy

Earnings quality is a demanding attribute of firm and is valued by investors in resource allocation decisions. High earnings quality firms create value for stakeholders and poor earnings quality causes value deterioration. This study takes into account earnings quality attributes of Pakistani corporate sector and investigates impact of ownership structure and financial health on firms’ earnings quality. Earnings quality has been measured by four attributes of accrual quality, earnings persistence, earnings predictability, earnings smoothness. A sample of 325 non-financial PSX listed Firms have been selected and classified into four unique categories on the basis of financial health (healthy and distressed) and ownership (family and non-family). The classification aims to determine level of earnings quality for each category. Results find significant effect of book financial position and ownership structure on earnings quality of firms. Findings reveal Earnings quality for non distressed family (NDF) firms was highest followed by non distressed non family firms (NDNF), while earnings quality for distressed family (DF) firms was poor and poorer for distressed non family (DNF) firms when firms were classified into these four categories. These results provide important implications for investors, analysts, regulators and standard setters.

The Impact of Audit Firm Size, Auditor Independence and Financial Expertise on Earning Quality: Mediating Role of Audit Quality

Earning quality of organization depends upon the audit quality and could be achieved using auditors’ expertise and firm size and this aspect demands the emphasis of new researchers. Hence, the current article investigates the effects of auditors’ independence, audit firm size and auditors’ financial expertise on earning quality of the manufacturing industry in Malaysia. The article also explores the mediating role of audit quality among auditors’ independence, audit firm size, auditors’ financial expertise and earning quality of the manufacturing industry in Malaysia. The study gets the data from the audit department of Malaysian manufacturing companies. The article checks the nexus among variables using smart-PLS. The outcomes revealed that the auditors’ independence, audit firm size and auditors’ financial expertise have a positive association with earning quality. The outcomes also exposed that audit quality significantly mediates among auditors’ independence, audit firm size, auditors’ financial expertise and earning quality of the manufacturing industry in Malaysia. The regulators could get the guidelines to achieve high quality earnings and audits using auditors’ independence and financial expertise.

Foreign Ownership dan Earnings Management pada Perbankan Asean

This research aims to examine the influence of foreign ownership on the earningsmanagement of banking companies in the ASEAN region. The population is bankingcompanies listed on the Stock Exchanges of four ASEAN countries: Indonesia, Malaysia, thePhilippines and Thailand. We took 430 companies as samples for this research from thesecountries. This research took 5 (five) years. The results of the study found that foreignownership has a negative relationship with earnings management because foreign ownershipcan reduce management actions to carry out earnings management; Foreign-owned bankingcompanies have higher earnings quality in the first five years, and foreign investors' homecountries that have a high CPI also have higher earnings quality. This research, based on thefindings, can state that foreign investors can improve the effectiveness of governance andmaintain earnings management.

AGENCIJSKI SUKOBI I KVALITETA FINANCIJSKOG IZVJEŠTAVANJA

This paper examines the impact of agency conflicts in owner-manager-creditors relations on financial reporting quality. Based on arguments from the agency theory and the positive accounting theory, we assume that companies without debt and in which managers are ultimate owners, i.e. where agency conflicts are not profound, have a higher earnings quality than companies using financial leverage and with separated owner-manager role. The data for empirical part of the research was gathered from Orbis Europe database. The sample consists of very large, large, and medium-sized companies from Croatia, Serbia, and Slovenia with financial data covering 2018 and 2019. In order to test research hypotheses the sample is divided into two groups depending on a company's ownership and debt characteristics. Descriptive statistics, univariate tests, correlation analysis and regression analysis are used to analyse the results. Our findings indicate that there is no statistically significant difference in the earnings quality concerning the type of ownership, while the level of financial leverage, by contrast, significantly decreases the earnings quality.

Relationship Banking and Firms’ Earnings Quality – Does it Matter Whether Banks are Creditors or Owners?

There is mixed empirical evidence on whether close banking relationships are associated with lower or higher earnings quality of borrowing firms. This paper analyzes how this evidence can be explained by the role of the bank, whether the bank is a creditor or equity-holder of the firm. We use a sample of Japanese public firms. In Japan, (1) banks historically have both close financial and personal ties to borrowing firms, (2) banks are not only lenders, but are also permitted to have an equity stake in the firm, and (3) detailed data on bank relationship characteristics are publicly available.One key result is that relationship banking is associated with lower earnings quality if the bank only provides debt. This effect is more pronounced in years of economic expansion. The results are in line with the theoretical literature, which argues that borrowing firms that want to conceal good performance from competitors benefit from relationship banking because banks’ access to private information lowers the demand for high earnings quality. However, if banks have an equity stake, they are more concerned about complying with insider-trading rules and governing agency problems of equity by efficient executive compensation contracts. Consistently, the second main finding is that the firm's earnings quality improves significantly with a bank's equity stake, regardless of the state of the economy. These results are robust according to various specifications of relationship banking or earnings quality.

Do audit attributes impact earnings quality? Evidence from India

PurposeThe present study's goal is to analyze the impact of audit quality (AQ) on earnings quality (EQ) using different audit attributes. The study shows empirical evidence from India, considered an emerging market.Design/methodology/approachThe sample selected represents the 376 non-financial firms listed on the Bombay Stock Exchange (BSE). With a 20-year time frame, the authors used the absolute value of discretionary accruals (McNichols, 2002) (DA) as a proxy for EM, which is inversely related to EQ. The authors analyzed data using OLS, fixed effect (FE), 2SLS and Panel-IV estimators.FindingsThe authors found that most audit attributes positively affect EQ. In the Indian context, joint auditor (JA), auditor size (A_SIZE), auditor fee (A_FEE) and auditor tenure (A_TENURE) have a negative association with EM indicating high EQ. In contrast, auditor rotation (A_ROTATON) positively affects EM confirming low EQ.Research limitations/implicationsThe present study uses Big-4 and its member firms as a proxy of auditor size (A_SIZE); instead, other bases may be taken for it, like the dominant audit firms in a particular industry in sample data, etc. The authors have started audit tenure from the base year, i.e. 2001, which may ignore the association of auditor and auditee just before 2001.Practical implicationsThe study findings would enhance policymakers' willingness to prepare appropriate regulations regarding JAs and auditor rotation, which might improve financial market efficiency and reduce financial fraud among Indian corporates.Originality/valueTo the best of the authors' knowledge, this is the first study to incorporate “Joint Auditor” (JA) as a proxy for audit quality in the Indian context, which might significantly contribute to the literature.

Corporate political donations and audit fees: Some evidence from Australian audit pricing

We examine whether corporate political donations (CPDs) are associated with audit fees in the Australian setting. Our baseline results based on observations of Australian top 500 non‐financial companies show that, on average, firms with CPDs are associated with about 9% lower audit fees than firms without CPDs consistent with the strategic investment or resource dependency view. Using path analysis, we next show that high earnings quality resulting from strategic benefits of CPDs explains the association. Overall, these results confirm that firms use CPDs as strategic investments that are associated with lower earnings management, which leads to lower audit risk and hence reduced audit fees.

Earnings Quality of Companies Listed on The Indonesian Stock Exchange

Earnings is one of the indicators used in assessing company performance and investment decisions making process. Entities that have high profit does not necessarily have high-quality earnings. This study analyzes the earnings quality of companies listed on the Indonesia Stock Exchange from 2017 to 2021. The sample in this study was 272 companies which were determined using the purposive sampling method. This study uses secondary data, namely financial statements and closing stock price information consisting of 3 days before, the day of publication of financial statements, and 3-days after publication. The study sample analyzed with the Earnings Response Coefficient (ERC). Tests are carried out every year from 2017 to 2021 using the regression test. The test results show that there is no increase in the quality of earnings for companies listed on the Indonesia Stock Exchange. The test results also show that earnings quality decreased from 2017 to 2021. Thus, stakeholders can use other financial indicators or combine profit indicators with different hands in the investment decisions making process and in evaluating company performance.

Does Earnings Quality Affect Investment Efficiency? Evidence from Listed Firms in the Nairobi Securities Exchange of Kenya

Aim/purpose – This paper aims at examining the impact of earnings quality on investment efficiency. The motivating factor is occasioned by poor financial reporting quality standards, higher costs of investment that characterize most developing countries and in particular Kenya where agency problems and insufficient information sent to the public by managers are rather severe and likely to lead to inefficient investment. Design/methodology/approach – This study uses a sample of 28 Non financial firms listed in the Nairobi Securities Exchange and data for the period 2010-2020. Data was analyzed through fixed effects regression analysis. Findings – The study finds a positive link between earnings quality and investment efficiency of firms listed in the Nairobi Securities Exchange. Specifically, high earnings quality increases investment efficiency and improves investment project selection by reducing information asymmetry between managers and shareholders. Research implications – Based on the results, the study recommends that since earnings quality enhances investment efficiency, firms need to strengthen internal mechanisms and increase earnings quality. Besides, corporate shareholders should pay more attention to the earnings quality to gain more return on their investment opportunities. Further, it is necessary for shareholders to continuously monitor the firm's activities and prevent adverse activities from harming their interests.

Investigation of intellectual capital and firm performance in Thailand: Mediating role of earnings quality

This study was conducted to investigate two main aspects. First, it seeks to analyze how intellectual capital impacts firm performance. Second, it examines how intellectual capital impacts firm performance through earnings quality. To achieve these objectives, 114 financial datasets from service businesses listed on the Stock Exchange of Thailand (SET) during the period from 2019 to 2020 were utilized. The hypotheses were tested through various analytical techniques, including descriptive statistics, normality tests, a correlation matrix, structural equation models, and path analysis. The findings revealed that earnings quality indirectly impacted firm performance, as assessed by Tobin's Q and return on assets. The study demonstrated that earnings quality, measured through discretionary accruals, served as a partial mediator between intellectual capital and return on assets. Furthermore, earnings quality was identified as a full mediator in the association between intellectual capital and Tobin's Q. After analyzing the data during the COVID-19 pandemic, it was found that businesses that utilized information technology systems and employed efficient distribution channels demonstrated high relational capital efficiency (RCE). This efficiency positively affected market value. The practical contribution of this study provides managers with measurement methods for intellectual capital development, enabling them to enhance operational efficiency in intellectual capital and generate high earnings quality that reflects market value. Additionally, it highlights the importance of adapting to digital-era economic changes. Regulatory bodies can further promote and support intellectual capital to increase market value.

Pengaruh Leverage, Ukuran Perusahaan, Pertumbuhan Laba, dan Profitabilitas terhadap Kualitas Laba: Studi pada Perusahaan Basic Materials yang Terdaftar di Bursa Efek Indonesia Tahun 2017-2021

This research aims to study how leverage, firm size, profit growth, and profitability affect earnings quality. The study uses quantitative approach with associative method. Basic Materials companies that listed on Indonesia Stock Exchange in 2017-2021 with total of 97 companies are the population used in the study. Researchers use purposive sampling in selecting samples resulting in 67 companies meeting the criteria determined. Data used is secondary data obtained using documentation observation method from www.idx.co.id. With total of 335 data collected, researchers use multiple linear regression with the SPSS 25 programs. Results show that firm size has significant positive effect on earnings quality. Meaning that larger company has higher earnings quality. In contrast, earnings quality is not significantly affected by leverage, profit growth and profitability of firm. Further researches are hoped to expand the observation period, use other variables, and study other sector of company to show better result.

CEO power, audit committee effectiveness and earnings quality

PurposeThe purpose of this study is to establish the relationship between chief executive officer (CEO) power, audit committee effectiveness and earnings quality in regulated firms in Uganda.Design/methodology/approachThe authors employed cross-sectional and correlational research designs, based on a sample of 136 regulated firms in Uganda. Data were collected using a questionnaire survey from Chief Finance Officers and Chief Audit Executives. Data were analyzed using a Statistical Package for Social Sciences and Partial Least Squares Structural Equation Modeling.FindingsResults indicate that CEO power causes negative variances in earnings quality. The results also reveal that audit committee effectiveness positively relates relatively similarly with earnings quality. In addition, CEO power and audit committee effectiveness are negative and significantly related. The results further indicate that CEO power and earnings quality are mediated by audit committee effectiveness.Research limitations/implicationsCEO power creates an opaque accounting environment which may leave the stakeholders unable to evaluate the true economic reality of the firm. Audit committee effectiveness is an important enabler for reporting high-quality earnings even in the presence of a powerful CEO.Originality/valueThis study contributes toward a methodological stance of using perceptions to understand earnings quality in regulated firms in Uganda. This is probably the first study that has specifically explored earnings quality using only the fundamental qualitative characteristics of accounting information (as proxies) as enshrined in the Conceptual Framework for Financial Reporting 2018 particularly in Uganda since Her adoption of International Financial Reporting Standards in 1998. Second, the indirect effect of audit committee effectiveness and CEO power is tested.

Pengaruh Environmental Policy, Environmental Pollution, Environmental Energy, Dan Environmental Financial Terhadap Kualitas Laba

This research is a quantitative research and the aim of this research is to empirically examine the influence of environmental policy, environmental pollution, environmental energy, and environmental finance on earnings quality and profitability, leverage, and company size as control variables. Earnings quality is measured using real earnings management as a measurement.This study uses secondary data, namely non-financial companies listed on the Indonesia Stock Exchange for the period during 2019-2021 . The total sample in this study was 198 samples using the panel data regression analysis method and using data analysis with STATA. The research results show that environmental policy, environmental pollution, environmental energy, and environmental financial no significant effect on earnings quality. But there is a significant and positive effect on the control variables including: profitability, company size and debt ratio on earnings quality. The limitation of this study is that the population is non-financial companies and only measures the disclosure of sustainability reports only from pollution, energy, finance and policy. The practical implication of this research is that the more sustainability report disclosures made by companies, including: policies, pollution, energy and finance, no significant effect on the quality of earnings in companies listed on the IDX, and the increasing profitability, debt ratios and company size, the higher earnings quality, so that investors can consider profitability, company size and debt ratio in investment decisions because one of the considerations of investors is profit. The original value of this research is that this research measures more specific environmental reporting disclosures including: environmental policy, environmental pollution, environmental energy, and environmental financial and earnings quality measurement in this study uses real earnings management with the Cohen and Zarowin (2010) model which is still rarely used.

Risk Disclosure and Earnings Quality in Indonesia Banking Industries: Fair Value, Diversification, Financial Stability

High earnings quality can reflect a company’s actual performance. Stakeholder needs high earnings quality as earnings information is used for decision-making by stakeholder. This study investigates the effect of fair value, diversification, and financial stability on earnings quality and the roles of risk disclosure in moderating these effects. This study employs secondary data sourced from annual reports available at www.idx.com. The sample used in this study is bank companies from 2016 to 2020. Using purposive sampling, the sample obtained in this study was 180 observations. The research data were analyzed using multiple linear regression for panel data. This study suggested that fair value does not affect earnings quality. Other than that, diversification positively affects earnings quality while financial stability negatively affects earnings quality. Furthermore, risk disclosure failed to moderate the effect of fair value, diversification, and financial stability on earnings quality. This study indicates that the Indonesian Financial Services Authority needs to regulate the bank's diversification and risk disclosure policies. Moreover, the Indonesian Financial Services Authority should maintain and improve the bank’s financial stability policies.

CEO attributes, board independence, and real earnings management: Evidence from Nigeria

Motivated by agency conflicts of real earnings management and upper echelons in CEO demographic characteristics, this study examines the effect of CEO attributes on real earnings management and addresses the question of whether the presence of an independent board ensures accurate and reliable financial reporting practice. The study also examines the extent to which independent boards moderate the relationship between CEO attributes and real earnings management. Using a sample of 292 observations from Nigeria, an emerging market, from 2018 to 2021, a feasible generalized least square (FGLS) regression model was used to analyze the data. The authors also consider alternative measures of real earnings management. Our results demonstrate that CEO financial expertise, compensation, and CEO nationality reduce real earnings management and improve the financial reporting quality. Accordingly, the results show that independent directors on the board strengthen the CEO’s ability to reduce likely earnings manipulation. However, we find that the presence of a female CEO does not mitigate real earnings manipulation, but that the presence of independent directors enhances the ability of female CEOs to reduce earnings manipulation and produce reliable financial reports. Our results are robust and may have implications for regulators, shareholders, managers, and researchers because it shows that CEO attributes and the presence of independent directors on the board are associated with higher earnings quality.

Does Earnings Quality Influence Corporate Social Responsibility Performance? Empirical Evidence of the Causal Link

The study examines the causal links between earnings quality and corporate social responsibility (CSR) performance using a large sample of United States (US) firms from 1992 to 2013. We first find that the association between earnings quality and CSR performance is positive and significant. We then test the flow of causality using Granger's (1969) lead–lag analysis to determine whether changes in earnings quality cause changes in CSR performance or vice versa. Our findings show that changes in earnings quality cause changes in a firm's CSR performance but not vice versa. Further analysis shows that earnings quality reduces the cost of equity capital for firms with higher CSR performance. These findings suggest that one plausible means by which firms with higher earnings quality can maintain better CSR performance is to reduce their cost of equity capital.