Earnings quality and stock returns

Konan Chan, Louis K.C. Chan, Narasimhan Jegadeesh, Josef Lakonishok

Research output: Contribution to journalReview articlepeer-review

Abstract

An exclusive focus on bottom‐line income misses important information contained in accruals (the difference between accounting earnings and cash flow) about the quality of earnings. Earnings increases that are accompanied by high accruals, suggesting low‐quality earnings, are associated with poor future returns. We explore various hypotheses—earnings manipulation, extrapolative biases about future growth, and underreaction to changes in business conditions—to explain accruals’ predictive power. Checks for robustness using within‐industry comparisons and data on U.K. stocks are also provided.
Original languageEnglish (US)
Pages (from-to)1041-1082
Number of pages42
JournalJournal of Business
Volume79
Issue number3
DOIs
StatePublished - May 2006

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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