Quality Of Earnings: The Composition And Persistence

This paper takes the study of earnings quality mainly from the composition (resource components and accrual-cash components) and persistence view. Based on the collection collation of the foreign and domestic research, the paper states the definition of earnings quality should conclude tow contents: qualitative characteristics of earnings as information and profitability. Accordingly, the paper gives measures to them. The emphasis of this paper is to analyze and appraise the profitability of accounting earnings from the composition view and persistence view. The result suggests that to get an appropriate appraise for the earnings quality we should take account of both the current profitability and the persistence of earnings.The paper has a research on the persistence of different components of earnings. In this research, earnings are decomposed into operating earnings and non-operating earnings according to the resource and into accrual-earnings and cash-earnings according to its realized way. The paper investigates whether there are different persistence between the operating earnings and the non-operating earnings or between the accrual-earnings and the cash-earnings. The result confirms that operating earnings have a better persistence than non-operating earnings and cash-earnings have a better persistence than accrual-earnings, which is consistent with the study of some foreign researches such as Beneish and Vargus (2002).According to some domestic research there exists a 6% and 10% phenomenon in the distributing of the ROE of the companies listed in China. Thus the sample is sorted into tow groups by ROE. In the normal group the samples' ROE is between 6% and 8% or between 10% and 12% while in suspected group ROE is in other intervals above zero. The empirical research investigates whether there is difference between the earnings quality of two groups from the composition view and persistence view. The results show that combining the analysis of current earnings components with the analysis of earnings persistence the evidences which confirm higher quality in normal group are founded.From the results the paper suggests:(1)When the users of financial statements analyze the earning information, the composition characteristic (operating earnings proportion and cash-earnings proportion) should be paid more attention. Particularly the cash-earnings are very important to recognize the earnings quality.(2)More than the analysis of current profitability, analysis to the persistence of earnings should be taken into account, especially the persistence of different components. The persistence of cash-earnings are respected more important.To appraise the earnings quality in a comprehensive way, both the two aspects above should be considered. The results also inform us cash-earnings should be valued. The innovations of this paper are:(1)The research confirms the hypothesis that cash-earnings have a higher persistence than accrual-earnings which have been mentioned by some foreign researchers. In the same time the results also give support to the view that operating earnings have longer persistence.(2)The empirical research finds the supporting evidence for possible earning management or manipulation hiding behind the 6% and 10% phenomenon.