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Accruals quality, managers’ incentives and stock market reaction: evidence from Europe

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  • Antonio Cerqueira
  • Claudia Pereira

Abstract

We investigate if accruals quality is a valuable indicator of earnings quality for stock market investors. Our particular focus is on the incremental informative value of taking into account managers’ incentives for using accruals. We propose a market-based approach for assessing the usefulness of this indicator to improve investors’ decisions. Specifically, we examine the association between accruals quality and information asymmetry among stock market participants. Our empirical study uses data on European firms and our results are consistent with a positive association between poor earnings quality and high information asymmetry. However, given some previous studies suggesting that accruals-based measures may be noisy indicators of earnings quality, we develop a method to increase the informational content of the accruals quality measure. Based on our results, we find that combining accruals quality with the dispersion in analysts’ forecasts provides a better indicator of earnings quality rather than only accruals quality.

Suggested Citation

  • Antonio Cerqueira & Claudia Pereira, 2017. "Accruals quality, managers’ incentives and stock market reaction: evidence from Europe," Applied Economics, Taylor & Francis Journals, vol. 49(16), pages 1606-1626, April.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:16:p:1606-1626
    DOI: 10.1080/00036846.2016.1221047
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    1. Himanshu & Jatinder P. Singh & Ashwani Kumar, 2020. "Prioritizing and Establishing Cause and Effect Relationships Among Financial Reporting Quality Metrics," Vision, , vol. 24(3), pages 330-344, September.

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