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.

Citation

Duarte, A.F., Lisboa, I. and Carreira, P. (2022), "Does earnings quality impact firms’ performance? The case of Portuguese SMEs from the mold sector", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-12-2021-0444