Earnings quality and information transfers

This study examines whether the earnings quality of a firm that first announces quarterly earnings in its industry impacts the magnitude of intra-industry information transfers. Prior research shows that higher quality earnings better reflect the operating fundamentals of a firm. I argue that because earnings of high quality contain better information about a firm's performance, they are more helpful to investors as they value non-announcing firms (firms which make earnings announcements later than the first announcer) in the same industry, resulting in greater information transfer. The results are consistent with my hypothesis when earnings quality is captured by market-based measures (ERC and value-relevance), but not when it is captured by accrual-based measures (abnormal accruals and accrual quality). One possible explanation for this finding is that investors incorporate market-based and accrual-based earnings quality into earnings expectations differentially.