Does earnings quality impact firms’ performance? The case of Portuguese SMEs from the mold sector

Abstract

Purpose This study aims to study the impact of earnings quality on firms’ financial performance. Design/methodology/approach An unbalanced panel data of 237 small- and medium-sized Portuguese companies from the mold industry, using 2010–2018 yearly data was analyzed. While most studies focus only on earnings management when assessing earnings quality, in this study six proxies for earnings quality are used, namely, accruals quality (a proxy for earnings management), earnings persistence, earnings predictability, earnings smoothness, earnings timeliness and earnings conservatism. Moreover, two proxies of financial performance are considered, the return on assets and the economic value added. An econometric model was estimated using either a fixed-effects or a random-effects specification to account for the individual firm-specific effects and ensure heteroscedasticity corrected estimates. Findings The results show that managers must be concerned with the quality of reported earnings, as it can affect positively firms’ financial performance, especially regarding accruals quality. Persistence, predictability, smoothness, timeliness and conservatism are shown not to exert significant influence on financial performance in the sample. Research limitations/implications This work contributes not only as a literature review on these thematic but also to firms’ managers and stakeholders, who have information that helps them select strategies that guarantee earnings quality and improve firms’ financial performance. Originality/value This study proposed an econometric model that studies the relationship between earnings quality (using several proxies for it) and financial performance that can be applied to all companies.

Do audit attributes impact earnings quality? Evidence from India

“…McNichols (2002) further improved the (Dechow and Dichev, 2002) model and studied the mapping ability of cash flows for accruals after controlling for the accruals due to changes in credit sales and depreciation accruals on PPE. In the present study, we have used the McNichols model (2002) as suggested in past studies (Duarte et al ., 2022).…”

“…Reported earnings quality (EQ) is a multidimensional concept and can be measured and evaluated through various factors, including discretionary accruals (DA) quality, earnings smoothness, earnings predictability, earnings persistence, earnings timeliness and value relevance (Duarte et al ., 2022; Gaio and Raposo, 2011). Literature on EQ supports that most of the studies on EQ used DA as an inverse proxy which is related to earnings management (EM) practices.…”

A Screening of Tools to Measure the Quality of Financial Reporting

“…(Chi, 2013) incidences of small positive earnings conservatism abnormal accruals earnings smoothness auditor choices "Some personal observations on the debate on the link between financial reporting quality and the cost of equity capital" (Shevlin, 2013) incidences of small positive earnings conservatism abnormal accruals earnings smoothness auditor choices "Quality of financial statements, financial constraints, and investment efficiency: evidence in Vietnam" (Hung Ngoc DANG, 2020) 5 different methods "Does earnings quality impact firms' performance? The case of Portuguese SMEs from the mold sector" (Duarte, 2022) accruals quality earnings persistence earnings predictability earnings smoothness earnings timeliness earnings conservatism Source: Authors projections…”

Roles of board of directors and earnings management across SMEs life cycle: evidence from the UK

“…Although, previous literature provides evidence of how board characteristics influence EM practices in large enterprises (Abdou et al , 2021; Alves, 2023; Chatterjee and Rakshit, 2023; Chee and Tham, 2021; Cho and Chung, 2022; Cornett et al , 2009; Elsheikh et al , 2023; Goel and Kapoor, 2022; Liu and Lu, 2007; Mensah and Boachie, 2023; Mensah and Onumah, 2023; Musa et al , 2023; Prencipe and Bar-Yosef, 2011; Widagdo et al , 2022; Roy and Alfan, 2022; Sáenz González and García-Meca, 2014; Sehrawat et al , 2019; Sultana et al , 2017) and EM practices in small- and medium-sized enterprises (SMEs) (Balachandran et al , 2021; Chansarn and Chansarn, 2016; Chiu and Wei-Hua, 2020; Duarte, 2022; Gajdosikova et al , 2022; Gandía and Huguet, 2021; Höglund and Sundvik, 2016; Huang et al , 2022; Maglio et al , 2020; Martinez-Martinez et al , 2021; Park et al , 2021; Séverin and Veganzones, 2021). However, there is little research examining the link between the roles of BOD and earning management practices among SMEs (Chiu and Wei-Hua, 2020 and Maglio et al , 2020) and none specifically examines such relation among SMEs operating in the UK context.…”