Quality of Earnings and the Accruals Anomalies

Abstract

The purpose of this research is to examine the relation between the quality of earnings and the mispricing of accruals persistence, and accruals anomalies proposed by Sloan (1996). While Ahmed et al. (2004) uses the degree of earnings management as the measure of quality of earnings, this study uses estimation errors of accruals proposed by Dechow and Dichev (2002). In the paper, I divide the samples into high quality and low quality groups. Following Herrmann et al. (2001) and Sloan (1996), I perform the efficiency test and the hedge portfolio test to each partial period. As a result, the hypothesis of this study is supported and I generally confirm that the estimation errors of accruals as the quality of earnings are significantly correlated to the mispricing of accruals persistence and the accruals anomalies.