| Earnings quality refers to the book earnings’ability to turn into cash,the book earnings’authenticity and persistence.If earnings are real,continued,and the matches of reported earnings and cash flow is good,the quality of earnings is high.Earnings quality includes four aspects:the persistence of the earnings, the structure of the earnings, the earnings quality related to cash flow, timeliness of earnings. Factors that affect earnings quality can be divided into external and internal factors. External factors are accounting factors, auditing factors,and so on. Internal factors are earnings management and corporate governance, and so on. Accounting information distortion problem in China is mainly caused by earnings management.Now academic circles have many kinds of methods to evaluate earnings quality, such as Jones’model and a revision of Jones’model, index analysis, the time series analysis, ARIMA model to study earnings persistence,and ERC(arnings response coefficient). Regardless of any approach, we can’t use a data to represent earnings quality. In this paper, I construct a index system and do factor analysis of the indexs to measure earnings quality.I choose the indexes that are available and relevant to earnings quality. This paper focuses on the financial indexes and equity structure indexes that reflect the earnings quality.The chosen indexs reflect three aspects of the earnings quality:the persistence of the earnings, the structure of the earnings, the earnings quality related to cash flow.The indexs can be divided into three categories:indexes reflecting profitability, indexes reflecting the extent to which the reported earnings is accompanied by the cash flow, indexes reflecting earnings persistence, each category represents a certain aspect of earnings quality.Indexes reflecting profitability are Return on net assets(weighted, net), sales margin, indexes reflecting the extent to which the reported earnings is accompanied by the cash flow are net operating cash flow/operating net income, net profit cash coverage, indexes reflecting earnings persistence are net income/gross profit, EPS growth rate, growth rate of cash flow per share from operating activities, the growth rate of return on net assets. The ownership structure indexes are Ownership Concentration of the biggest shareholder and the share-holding percentag of Total Institutional Investors.Based on the index cross-sectional data of the listed companies in the main board of Shanghai Stock Exchange in2009and2010,1use factor analysis to extract4factors from10variables.Four factors are as new variances, score of each factor as Coefficient of variation,Variance contribution rate of each factor to original variables as weight,to construct earnings quality score of each sample.According to different standards I divide the samples into two types to do descriptive statistical test and the Wilcoxon signed rank test,and the results prove that the earnings quality score can represent earnings quality.Earnings quality is a very important variable affecting the value of the company.So I studied the impact of earnings quality on firm value.The impact of earnings quality on firm value means the correlation between earnings quality and equity securities value or value of the company, which can be represented by the degree of statistical correlation between earnings quality and stock prices or stock returns. In this paper, the K-Means clustering analysis method is applied to the study of the Impact of earnings quality on firm value. The assumptions made is there is positive correlation between earnings quality and the annual cumulative return rate. Based on the samples selected in Factor Analysis before, I exclude the companies whose data is incomplete, ST companies (including the*ST companies). Variables are earnings quality score and the annual cumulative return rate. Throught the study,I find that the higher the earnings quality score is,which means the higher earnings quality,the higher the annual cumulative return rate is. |
