A structural equation model for analyzing the association between some attributes of earnings quality and value relevance. Results from the structural model

Abstract

This study investigates the impact of earnings quality on the relationship between earnings and stock prices. In order to incorporate the multidimensional nature of earnings quality, we use Structural Equation Models. This methodology is suitable for mitigating the effects of choosing the measurement method of earnings quality and it has been highly developed in other social sciences fields, but it is underused in accounting research. Our results show that investors value the quality of accruals and dislike earnings manipulated by discretionary accruals, except when this manipulation reduces earnings volatility. The study is focused on various desirable features of earnings in order to evaluate the relationship between earnings quality and its value relevance. It values whether earnings management is opportunistic or informative from a new approach and, finally, it provides a major methodological contribution to the study of earnings quality with Structural Equation Models.