The authors thank Michael Bradbury (deputy director) and an anonymous referee for helpful comments.
Earnings quality and firm valuation: international evidence†
Article first published online: 16 AUG 2010
© 2010 The Authors. Accounting and Finance © 2010 AFAANZ
Accounting & Finance
Volume 51, Issue 2, pages 467–499, June 2011
How to Cite
Gaio, C. and Raposo, C. (2011), Earnings quality and firm valuation: international evidence. Accounting & Finance, 51: 467–499. doi: 10.1111/j.1467-629X.2010.00362.x
- Issue published online: 2 MAY 2011
- Article first published online: 16 AUG 2010
- Received 19 July 2009; accepted 25 March 2010 by Michael Bradbury (Deputy Editor).
- Earnings quality;
- Firm value;
- Investor protection
This study uses a sample of over 7000 firms in 38 countries to investigate the relation between firm valuation and earnings quality. We find a positive and significant relation between firm valuation and an aggregate earnings quality measure based on seven earnings attributes (accruals quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism). This relation is particularly strong for firms with greater investment opportunities and more need for external finance, and for firms in low investor protection countries. Thus, firms are able to compensate for a weak legal environment by adopting higher earnings quality standards, particularly when they need to gain access to global capital markets. Overall, our findings suggest that firms with higher earnings quality are valued more highly in stock markets, supporting the idea that investors require a premium for the information risk associated with lower-quality earnings.