Listed Company Quality Indicators Evaluation System

Chinese Listed companies' earnings quality is generally on the lowlevel. The selective examination of the quality of accounting informationby finance ministry's continuous six years during 1999-2004 disclosesthat most of the selected enterprises existed information distortion and theirregular activities such as enterprises accounting information distortionexist quite commonly. But earnings information is the most important andthe most synthesis part of accounting information. So earnings quality hasbecome the concerned focus of Stakeholder. At present Chineseperformance evaluation system don't attach important to earnings quality,it is of great realistic and academic significance to set up the syntheticindex evaluating system of earnings quality to appraise and analyze it.On the basis of correlation theory and qualitative analysis ofearnings quality, the paper conceives an evaluating system from qualityattributes of earnings aiming at the shortages of existing evaluationsystems. The system involves four core quality attributes—structurestability, the ability of obtaining cash, growth and security. Then thepaper chooses five financial indexes which have a potent effect onearnings quality and adopts factor analysis so as to get the earningsquality index(EQI). The evaluation standards of earnings quality's in thispaper is defined to be "the ability of listed companies' earnings predictingthe future performance and keeping on the continuous growth", and thepaper uses Ratio of Cash Flow(RCF) as a index of assessing companies'performance, then construct the growth ratio of RCF and the next year'sRCF as proxies. At last, Chinese listed companies of machinery,equipment, instrument industry in Shanghai Stock Market are chosen asthe sample to carry on empirical research on synthesis index appraisalmodel of earnings quality which designed by author, the empiricalresearch uses the annals data during 2003-2005. The paper empiricallyconcludes that the higher the quality of earnings quality is, the betterearnings increasing trend and earnings predictive power are. Thus thescientific nature and feasibility of this valuation method are verified.