Studying Relationship between Changes of Cash Earnings per Share and Earnings Quality

In this research, reaction of investors in capital market to changes of cash earnings per share and earnings quality was studied considering earnings quality and the main goal of this paper is to determine relationship between earnings quality and accumulated abnormal stock return in the companies of which cash earnings have increased (decreased). In fact, earnings quality is high. Market is expected to show reaction to cash earnings increase because the main idea of this paper is that reaction of market to new information changes reversely with accuracy of the published information. The previous news relating to earnings quality is aligned with recent news relating to cash earnings increase and both news indicate increase of future cash flows. Considering that news relating to earnings quality has been reflected in the financial statements before and led to reaction of market, the market is expected not to show overreaction to increase of cash earnings. Earnings quality has been measured based on earnings persistence. After controlling the information medium, investment opportunities, attitude of cash earnings receivers and operating risk of company, the findings show that reaction of market to increase (decrease ) of cash earnings of the companies is negative (positive ) as predicted based on earnings quality based on earnings persistence. Change in stocks price is an evident criterion of systematic change of investors’ beliefs which has been affected by information content of the accounting earnings.

Earnings quality, reaction of market (accumulated abnormal stock return), cash earnings changes.