Balsam et al. (2003) uses the level of discretionary accruals as a direct measure for
earning quality. The discretionary accruals model is based on a regression relationship
between the change in total accruals as dependent variable and change in sales and
change in the level of property, plant and equipment, change in cash flow from
operations and change in firm size (total assets) as independent variables. If the
regression coefficients in this model are significant that means that there is earning
management in that firm and the earnings quality is low.
This research presents an empirical study on using three different approaches of
measuring the quality of earnings on different industry. The notion is; if there is a
complete consistency among the three measures, a general assessment for the quality
of earnings (high or low) can be reached and, if not, the quality of earnings is
questionable and needs different other approaches for measurement and more
investigations and analysis.
The rest of the paper is divided into following sections: Earnings management
incentives, Earnings management techniques, Model development, Sample and
statistical results, and Conclusion.