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.
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