The effect of earnings quality and country-level institutions on the value relevance of earnings

Original Research

DOI: 10.1007/s11156-009-0117-z

Cite this article as:
Cahan, S.F., Emanuel, D. & Sun, J. Rev Quant Finan Acc (2009) 33: 371. doi:10.1007/s11156-009-0117-z

Abstract

This study investigates the relationship between the value relevance of earnings and earnings quality across countries. We find that there is a stronger relationship between earnings quality and the value relevance of earnings in countries with high investor protection than in countries with weak investor protection. We also find that the association between the value relevance of earnings and earnings quality is higher when a country’s information environment is less opaque. Overall, our study documents evidence on international differences in the ability of stock prices to capture useful accounting information, consistent with the notion that the returns-earnings association reflects not only the quality of accounting earnings but also the informativeness of stock prices.

Keywords

Returns-earnings associationInvestor protectionInformation opacityCross-country

JEL Classification

G1G15M41

Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Department of Accounting and FinanceUniversity of AucklandAucklandNew Zealand
  2. 2.Odette School of BusinessUniversity of WindsorWindsorCanada