Accounting

Business

Valuation (finance)

Earnings

Financial economics

Epistemology

Philosophy

Econometrics

Null hypothesis

Economics

Earnings response coefficient

Variance (accounting)

Earnings quality

Quality (philosophy)

Earnings management

Accrual

The Accounting Review

ABSTRACT We study a model of earnings management and provide predictions about the time-series properties of earnings quality and reporting bias. We estimate the model to empirically separate two components of investor uncertainty: fundamental economic uncertainty, and information asymmetry between the manager and investors due to reporting noise. We find that (1) the null hypothesis of zero reporting bias is rejected; (2) the ratio of the variance of the noise introduced by the reporting process to the variance of earnings shocks is, on average, 45 percent; (3) the reporting noise plays a significantly less prominent role in valuation, due to the persistence of shocks to economic earnings; (4) the magnitude of investors' uncertainty created by reporting noise about firms' assets in place and about future earnings is similar; and (5) ignoring the possibility of reporting distortions would bias the estimates of variance and persistence of economic earnings.

Earnings Management and Earnings Quality: Theory and Evidence