Author(s)

Gregory M. Dempster^1*, Nathaniel T. Oliver²

¹Department of Economics and Business, Hampden-Sydney College, Hampden Sydney, VA, USA.
²Finance Area, IBM Global Business Services, Armonk, NY, USA.

Although earnings quality has been an important part of literature in accounting and financial economics for some time, there are relatively few examples of empirical work designed to isolate the effects of variation in earnings quality on the returns to equity ownership in the marketplace. Building on the previous literature, we conduct a robust analysis of these effects by employing earnings restatements as a proxy for quality of earnings in a multi-factor return model. Our results indicate that material misstatements of earnings are priced risk factors that have persistent (long-run) impacts on equity returns. Applications to business practice are discussed in the light of these results.

Earnings Quality, Cost of Equity, Financial Markets, Multi-Factor Return Models

Dempster, G. and Oliver, N. (2019) Financial Market Pricing of Earnings Quality: Evidence from a Multi-Factor Return Model. Open Journal of Business and Management, 7, 312-329. doi: 10.4236/ojbm.2019.71021.