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Using the FASB’s Qualitative Characteristics in Earnings Quality Measures
Abhijit Barua,
Florida International University
ABSTRACT. This study develops a measure of earnings quality in line with the primary qualitative characteristics specified in the Statement of Financial Accounting Concepts (SFAC) No. 2 (FASB 1980). I derive a summary measure of earnings quality by applying factor analysis on fifteen variables representing different components of two primary dimensions of earnings quality: relevance and reliability. I then test whether the earnings quality construct used in this study reflects decision usefulness to investors, which is operationalized in two ways: value relevance and cost of capital analyses. Empirical results from the both approaches suggest that the earnings quality measure developed in this study reflects decision usefulness to investors, which is consistent with the FASB’s assertion.
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