The association of earnings quality with corporate performance

Purpose - The aim of this paper is to investigate the association of earnings quality with corporate performance of publicly listed firms of China and tries to provide a new explanation. Poor earnings quality is normally characterized by unhealthy profitability and/or untrue financial information, which leads to a misallocation of capital and low corporate performance. The largest emerging economy of China has experienced a fast and fluctuant growth, while the companies have been thought of low earnings quality. Design/methodology/approach - Initial univariate and multivariate analyses are conducted using four earnings quality measures and either accounting-based corporate performance or market-based corporate performance. Further analyses apply unmanaged earnings, earnings-increase management and financially distressed firms. Findings - The authors find that low earnings quality is associated with high corporate performance for the Chinese publicly listed firm in their sample period. Further evidence shows that earnings management is only a contributor to the negative relationship, not its main driver. They argue that the negative association of earnings quality with corporate performance is a phenomenon of a new emerging market within an economy booming period, particularly in China. Research limitations/implications - The results and argument of this paper may not totally follow the traditional literature. But they provide a new research question that requires further studies. Originality/value - In theoretical discussion, this paper partitions earnings quality into two components: One results from reporting accuracy and the other results from firm’s operating outcome. In empirical analyses, this paper examines both accounting-based performance and market-based performance, and both managed earnings and unmanaged earnings.