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Using the FASB's Qualitative Characteristics in Earnings Quality Measures

In this study, I develop a measure of earnings quality by using qualitative characteristics of financial statement information specified in the Statement of Financial Accounting Concepts (SFAC) No. 2 (FASB 1980). I derive a summary measure of earnings quality by applying factor analysis on fifteen variables representing different components of two primary dimensions of earnings quality: relevance and reliability. I then test the validity of the earnings quality construct by examining whether the construct reflects decision usefulness that is operationalized in two ways: value relevance and cost of capital analyses. I provide empirical evidence suggesting that the earnings quality construct reflects decision usefulness to investors, which is consistent with the FASB's assertion. Finally, I explore the relative desirability of each dimension in light of decision usefulness of earnings information, and find that investors, in general, prefer the relevance to the reliability dimension of earnings.

Identiferoai:union.ndltd.org:LSU/oai:etd.lsu.edu:etd-03172006-101515
Date17 March 2006
CreatorsBarua, Abhijit
ContributorsJeffrey M. Gillespie, Jacquelyn Sue Moffit, Ji-Chai Lin, Joseph A. Legoria, William M. Cready, John Kenneth Reynolds
PublisherLSU
Source SetsLouisiana State University
LanguageEnglish
Detected LanguageEnglish
Typetext
Formatapplication/pdf
Sourcehttp://etd.lsu.edu/docs/available/etd-03172006-101515/
Rightsunrestricted, I hereby certify that, if appropriate, I have obtained and attached herein a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to LSU or its agents the non-exclusive license to archive and make accessible, under the conditions specified below and in appropriate University policies, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report.

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