Earnings quality impacts accuracy of financial forecasts, affecting market decisions.
The study looked at how the quality of a company's earnings affects the accuracy of its financial forecasts. They used a model that compares working capital accruals to operating cash flows to measure earnings quality. The lower the quality of earnings, the bigger the errors in forecasting. This relationship held true even when considering other factors that could affect earnings. The results suggest that this model can help investors choose the best way to predict a company's future earnings.