USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF EARNINGS

USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF EARNINGS

We propose the EQ Score, a user-friendly model derived from the Q Test developed by Putman et al. (2005) to measure earnings quality and detect earnings management in financial statements. It is comprised of five financial ratios and the data needed to compute the EQ Score is readily available to an...

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Veröffentlicht in:Academy of Accounting and Financial Studies journal 2018-04, Vol.22 (2), p.1-12
Hauptverfasser: Gullett, Nell S, Kilgore, Ronald W, Geddie, Mary F
Format: Artikel
Sprache:eng
Schlagworte:
Accounting
Corporate profits
Earnings management
Earnings per share
Financial analysis
Financial performance
Financial ratios
Financial reporting
Financial statements
Macroeconomics
Profit margins
Profitability
Quality
Stock prices
Studies
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Zusammenfassung:We propose the EQ Score, a user-friendly model derived from the Q Test developed by Putman et al. (2005) to measure earnings quality and detect earnings management in financial statements. It is comprised of five financial ratios and the data needed to compute the EQ Score is readily available to any reader of annual financial statements. We find the EQ Score means for the firms that have been on the receiving end of S.E.C. enforcement actions for financial reporting are significantly lower than the EQ Scores for the socially responsible, admired firms. However, the proposed EQ Score of 5.00 is not a reliable benchmark for classifying reported financial statements as either high earnings quality or low earnings quality.
ISSN:1096-3685