Journal Article

A returns-based representation of earnings quality

Accounting Review 81(4): 749–780
Frank Ecker, Jennifer Francis, Irene Kim, Per Olsson, Katherine Schipper (2006)
Subject(s): Finance, accounting and corporate governance
Keyword(s): Earnings quality, returns-based measures,mimicking factor

We examine the properties of a returns-based representation of earnings quality, estimated from firm-specific asset pricing regressions augmented by an earnings quality mimicking factor. The coefficient on the earnings quality factor (the “e-loading”) captures the sensitivity of the firm’s returns to earnings quality in a given year or quarter, analogous to beta as a measure of the sensitivity of returns to market movements. Relative to other proxies for earnings quality, e-loadings can be calculated for larger samples of firms and can be estimated for shorter intervals at any point in time. Along all dimensions examined, we find that e-loadings perform well in capturing notions of earnings quality.

With the permission of the American Accounting Association

Volume 81
Issue 4
Pages 749–780