Modification of earnings quality capability measurement indices by adding the centralized tendency factor

Previous studies on earnings quality from the perspective of estimation error only focused on the dispersion degree of estimation errors. Due to market investors’ aversion to estimation error, centralized tendency factor is added in this study to modify the earnings quality capability indices by Chang et al. (2012) and correspond to investment risks resulted from earnings quality. With the 1988~2010 data from the U.S. Compustat financial database, this study measures estimation errors by the regression model (Francis et al., 2005), and in turn, applies modified earnings quality capability indices to help investors in assessment of investment risks.
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Modification of earnings quality capability measurement indices by adding the centralized tendency factor