Accounting Conservatism and the Effects of Earning Quality on the Return of Assets and Stock Return

Abstract

Decision making in the economic affairs needs information. The shortage of information causes the ambiguity of the decision making process. The financials provide some of the needed information of this process. The perception of the earnings as the most important information source of the company was being supported by empirical studies. The mentioned researches have shown that the decision makers anchor on the accounting earnings more than any other benchmarks. The purpose of the following research is to help investors and other users to be able to assess the degree of the effects of the conservatism on the earning quality and ROI. The results show that the earning quality index presented based on the conservatism index has the ability to describe some of the differences between return on the operational assets and the current stock returns from the current year to the next year. In other word, economic entities that use the conservative procedures are able to change the earning quality with making some changes in the investments of the operational assets.

Keywords

• conservatism index
• earning quality
• earning quality index
• rate of return on operational assets
• rate of return