Type of Document Dissertation Author Martin, Kris Rowland URN etd-10112005-115737 Title The Effect of Accounting Method Choice on Earnings Quality: A Study of Analysts' Forecasts of Earnings and Book Value Degree PhD Department Accounting and Information Systems Advisory Committee
Advisor Name Title Richardson, Frederick M. Committee Chair Brown, Robert Committee Member Easterwood, Cintia M. Committee Member Easterwood, John C. Committee Member Leininger, Wayne E. Committee Member Keywords
- accounting method choice
- book-to-market ratio
- earnings quality
Date of Defense 2002-03-01 Availability unrestricted AbstractWhether the quality of a firm's reported earnings affects investors' ability to predict
future earnings and stock returns is still a subject of much debate among accounting researchers.
Lev (1989) suggests that low quality earnings may be causing the relatively low correlation
between reported earnings and stock returns (or the market's evaluation of future earnings). This
dissertation used the valuation model described in Ohlson (1995) and Feltham and Ohlson
(1995) to explore the possible links between accounting method choices and the ability of
investors to use reported earnings to predict future earnings. The results demonstrate that prior
researchers' assumptions regarding which accounting methods are generally conservative or
liberal are reasonably accurate over large numbers of firms. The results also show that one
group of analysts (Value Line Investment Survey) is able to predict future earnings more
accurately over medium-term and long-term forecast horizons for firms using generally
conservative accounting methods than those firms employing generally liberal accounting
This research adds to the prior "quality of earnings" research by showing that analysts
can predict earnings more accurately for certain classes of firms (i.e., firms using conservative
accounting methods), thus increasing our knowledge of what constitutes high-quality earnings.
The research also explores the effects of growth on the quality of earnings question, the effects
of firm size, leverage, and industry membership on the relationship, and the robustness of the
Feltham and Ohlson Model to alternative definitions of key components of the model.
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