Errors-in-Expectations, Earnings Quality and the Value Premium

Project Member(s): Casavecchia, L.

Start year: 2014

Summary: This project will identify for the first time the direct link between firm earnings management, market expectation errors of earnings growth, and the value premium. We expect that the earnings of value and growth stocks are more likely to have a greater component of discretionary accruals. This component will reduce earnings quality and hence increase investor confusion in relation to firm future performance. Explicitly, income-decreasing (-increasing) accruals of value (growth) stocks will lead to pessimistic (optimistic) long-term forecasts of earnings growth for such stocks. When the market eventually revises positively (negatively) their previous pessimistic (optimistic) expectations, they will give rise to the observed value premium.

Keywords: Earnings quality, errors-in-expectations, value premium

FOR Codes: Finance Services, Financial Accounting, Finance, Financial Economics, Financial Services not elsewhere classified, Financial accounting

Acknowledgement of Country

UTS acknowledges the Gadigal people of the Eora Nation, the Boorooberongal people of the Dharug Nation, the Bidiagal people and the Gamaygal people, upon whose ancestral lands our university stands. We would also like to pay respect to the Elders both past and present, acknowledging them as the traditional custodians of knowledge for these lands.