earnings quality

Earnings Quality

A condition describing how earnings are recognized. Earnings of high quality are attributable to conservative accounting standards and/or strong cash flows. Low quality earnings come from artificial sources, such as inflation or aggressive accounting. For example, a publicly-traded company may claim strong earnings and consequently have a high stock price. However, the company may have low cash flow from operations and the strong earnings may come mainly from the accounting structures it uses. Therefore, its stock is overvalued. Quality of earnings ratings is subjective, but it does take into account matters such as corporate governance, inventory to sales ratios, and other factors.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

earnings quality

The extent to which a firm's reported earnings accurately reflect income for that period. Firms using conservative accounting practices tend to penalize current earnings and are said to have high earnings quality. At least over the short run, the earnings reported by a firm are as much a function of its accounting methods as they are a measure of its business success. Also called quality of earnings. See also inventory profit.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
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Analyzing the latest quarterly results for PSO, HASCOL and SHEL, analysts find a deteriorating free-cash flow situation with outflows from networking capital and additional borrowing underpin a relatively weak earnings quality picture.
Its Group CEO Joseph Abraham identified three C's to help the bank achieve its objective " corporate earnings quality, client experience, creativity and innovation, culture, and compliance.
It added that, "we believe BDO's earnings quality is higher than other banks given that a larger portion of its revenues are generated from recurring income."
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.
Considering that earnings quality can reduce the asymmetry of information and that information asymmetry can enable inefficient investment decisions, the following question arises: does the quality of financial information influence the efficiency of investment decisions?