Research On The Impact Of Internal Quality On Earnings Persistence

Earnings persistence,as an important feature of earnings quality,is conducive to predicting the company's future performance and improving company value,helping investors to make decision analysis and reduce risks.However,the occurrence of a series of financial frauds such as the "Enron Incident" cast a shadow over the company's accounting surplus,rendering the continuation of earnings forecasting ineffective,affecting investors 'decisions,and seriously damaging investors' interests.Therefore,the United States promulgated the SOX Act in 2002,and five departments such as the Ministry of Finance of China also issued "Basic Standards for Enterprise Internal Control" and "Supporting Guidelines for Enterprise Internal Control" in 2008 and 2010,respectively,triggering many scholars to explore the economic consequences of internal control.Many scholars have investigated the relationship between internal control and earnings quality,and relatively few literatures have studied the relationship between internal control quality and earnings persistence.In addition,the management of the company is responsible for the daily operation of internal control,and whether excessive executive power overrules internal control,making internal control a “decoration”,which deserves in-depth investigation.In view of this,this article selects the data of listed companies of Shanghai and Shenzhen Stock Exchange from 2014 to 2018 to explore the impact of internal control quality on earnings persistence and examine the moderating effect of executive power in the relationship between the two.First,a linear stage auto-regression model is used to measure the persistence of earnings,and use the logarithm of DIB internal control index as a proxy variable for internal control quality to study the impact of internal control quality on earnings persistence and its components;second,select 8 indicators to measure the power of executives from the four aspects of organizational power,ownership power,expert power and reputation power,use principal component analysis to get a comprehensive score of executive power.According to the 85 th quintile of the comprehensive score of executive power,the power is divided into a centralized group of executives and a non-executive centralized group,to further verify the regulatory role of executive power.The research results of this paper are as follows:(1)The quality of internal control is positively related to the persistence of earnings;(2)By dividing earnings persistence into accruals persistence and cash flows persistence,we find that the higher the quality of internal control,the higher the accruals persistence and cash flows persistence;(3)Further consider the role of executive power allocation structure in the relationship between internal control quality and earnings persistence,and find that the concentration of executive power will inhibit the promotion of internal control on earnings persistence.This article discusses the influencing factors of earnings persistence,and also provides countermeasures and suggestions for companies to improve the persistence of earnings from the aspect of improving internal control construction and restricting executive power.