Market Consequences of Earnings Quality for Malaysian Listed Companies

Abstract

This study draws on the theory that information risk, as posed by unreliable earnings figures is priced, and examines whether market penalises (rewards) companies for (high) earnings quality. Two ex ante measures of cost of equity (Gebhardt et al.2001 and Ohlson and Juetner-Nauroh 2000 (OJN)) and five accounting-based measures were estimated. A positive relationship between cost of equity estimates and earnings measures provided evidence that the market requires a higher return for a lower quality. The results showed a significant positive relationship between earnings quality measures of accrual quality and predictability, with both estimates of cost of equity. The abnormal total accruals and abnormal current accruals were significantly related OIN estimate of accruals quality only. The earnings quality measure of persistence, however, was not significantly related to either estimate of cost or equity.