Abstract

Prior studies show that, as accruals quality (hereafter, AQ) is increased, 1) information asymmetry is decreased, 2) accruals anomaly is reduced, and 3) managers' opportunistic behavior is restrained. In addition, they also show that 1) there is a significantly positive relation between AQ and audit quality, 2) the firms with high AQ are more sensitive to the market demand for the quality of accounting information, and 3) the accounting transparency is improved with AQ, leading to reduced agency problems. As I have provided above, the results of prior studies on AQ implies that accounting earnings with higher AQ is more useful. However, they don't provide directly the evidence of the relation between AQ and earnings' informativeness, except for Sohn et al.(2009). In this perspective, I investigated whether accounting earnings' informativeness is changed according to AQ. To achieve the purpose of the paper, I used the sample of firms listed on the securities market in Korea, as of December 31 every year, from 1991 to 2005. The financial companies are not included in the sample. AQ is estimated using the residuals from regressing total current accruals on past, current, and future cash flows. The absolute value of the residual is the first measure of AQ, and the standard deviation of the residual is the second measure of AQ. The results of analysis as follows. As AQ is increased, accounting earnings' informativeness is also increased as expected. This result is not changed 1) when the magnitude of the absolute value of accruals is controlled for, 2) when the audit quality is controlled for, 3) when the multicollinearity among variables is controlled for, and 4) when the volatility of cash flows is controlled for. As shown in the above, I think that the paper is contributable to the literature in that the paper investigated if AQ plays an important role in explaining the usefulness of accounting earnings, in addition to Sohn et al.(2009).

Keywords

• accruals quality
• earnings
• earnings' informativeness
• earnings response coefficient

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