Because the stock market tends to overvalue accounting earnings
, there is a need to validate the quality of earnings that companies report by looking at its cash flows.
This prudence treatment supports the findings of Ball and Shivakumar (2005) that accounting conservatism is commonly considered an indicator of earnings quality or at least a desirable property of accounting earnings
. Our results negatively correlate with the findings of Frankel and Li (2004) that financial reporting reduces information asymmetry by disclosing relevant and timely information and Barth et al.
Internal governance mechanisms and value relevance of accounting earnings
: an empirical study in the French context.
Earnings management is the judgmental adjustments/alteration in firm's reported accounting earnings
by managers in order to upsurge firm performance temporarily (Cornett et al., 2009; Garcia-Meca and Sanchez-Ballesta, 2009).
(2017), the higher the management incentive to "manage" corporate financial reports, the lower the credibility of accounting earnings
information contained in those reports.
Defond and Hung (2003) assess similarities and differences among industry firms, they found that different industries possess differing amounts of capital intensity and risk, thereby affecting cash flow and accounting earnings
. Industry membership, among other things, has been found to affect auditor choice (Carcello & Neal 2003), analysts' forecasts (Sinha, Brown, & Das 1997), corporate mergers (Stunda, 2017), and defined benefit plans (Towers & Watson 2016).
Basu (1997) first operationalize the definition of accounting conservatism as an asymmetrically greater reflection of "bad news" over "good news" in accounting earnings
b) infer about the influence of legal origins and financial standards on accounting earnings
However, sales revenues and accounting earnings
can be easily manipulated by the management (Dechow et al., 1995).
As both revenues and costs are recognized in accordance with accrual accounting, earnings appear as well on the right side of the balance sheet and the NOWC as a difference between revenues, in the form of accounts receivable, and costs, in the form of accounts payable, equals accounting earnings
. When [T.sup.AR] = [T.sup.AP] operating cash inflow and operating cash outflow appear on the same day and on this day the cash at hand equals accounting earnings