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Earnings Quality

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Overview

Understanding the quality of earnings is an essential part of processing and interpreting information. A high-quality earnings number will (1) reflect current operating performance, (2) be a good indicator of future operating performance, (3) and fairly annuitize the intrinsic value of the company. The authors of this Research Foundation of CFA Institute monograph discuss the types of earnings management techniques companies use, when earnings management is most likely to occur, and the role of directors, auditors, institutional investors, and analysts in monitoring management and improving earnings quality. They also examine how investors respond to earnings and highlight trading strategies based on earnings quality.

About the Author(s)

Patricia M. Dechow
Catherine M. Schrand

Catherine M. Schrand is associate professor of accounting at the Wharton School of the University of Pennsylvania. Previously, she was an auditor and audit manager specializing in the financial services industry at KPMG Peat Marwick. Professor Schrand's current research focuses on accounting for risk and, more generally, risk management practices and has been published in such journals as the Journal of Finance, Accounting Review, and Accounting Horizons. She holds a B.B.A. from the University of Michigan and an M.B.A. and a Ph.D. from the University of Chicago.