The role of earnings quality and future returns: An illustrative simulation of rational decision model

Abstract

This research explores earnings quality as a quality measurement of optimism and trust in future returns, where the highly sustainable business has driven up obedience and compliance as a sign of prudent and consistent accounting policy. Manipulation activity is a widely open chance for opportunistic motives, associated with low certainty as a handicap to estimate high accuracy future returns. All observations in the Indonesia-listed manufacturing companies occurred from 2010 to 2022; this causal research uses moderated regression with the dummy variable in testing hypotheses and robust checks. This purposive sampling research has 154 companies with an unbalanced panel; two testing models on equity and earnings are used as sensitivity testing of positive perception. The high-prospected firm pointed out the persistent willingness to implement positive earnings management with this high consistency accounting treatment, which has been transformed into no violation. A positive correlation exists between high earnings quality and future returns, including concentration on real earnings as symbolized by a rational decision model. High-quality accounting information is valid information in predicting the going concerned, linked up to anticipating the peach-lemon effect, where business growth and dividends are used as a signaling effect. This centralized one-platform of the financial reporting system and going private is aimed to minimize the chance of misleading information and anticipate the low-prospected. The highly prospective has high consistency accounting treatment and proper tax management as the validated sustainability indicator, and the rationality modeling is modified from the simplex-linear programming as simulative modeling concerning the Decision Tree and Bayes Theorems.

Keywords

• Earnings quality
• Future returns
• And rational model decision