Earnings Quality and Firms Market Risk: An Empirical Study in Indian Context

Abstract

Financial statements are one of the most important sources of information which aid stakeholders in taking various economic decisions. Accounting measures like earnings present in these statements assist in decision-making. However, this requires high quality of earnings. It has an impact on the firm’s market risk which further influences investment decision of the investors as well as the cost of raising funds by the firms. The present study addresses this issue and attempts to investigate the impact of earnings quality (EAQ) on market risk (SMR) of companies listed on the S&P BSE 100 Index for the period 2013-14 to 2017-18. A panel data analysis revealed that EAQ has a significant negative impact on firm excess returns (RRf). However, EAQ is not significantly related to firm’s SMR and hence EAQ doesn’t interact with market excess returns (MTRf) for affecting the RRf. Among control variables, only firm size is found to have a significant and negative impact on RRf as well as SMR. This study contributes to the literature by exploring the EAQ-SMR relationship in Indian context since the empirical evidence on other economies cannot be applied to India.

Keywords: CAPM, Discretionary Accruals, Earnings Quality, Market Risk, India

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