Fourth International Conference on Advances In Social Science, Management and Human Behaviour - SMHB 2016
Author(s) : M.R.P.WIJESINGHE
The earnings of the companies are imperative since it communicates information to stakeholders and to predict stock prices in future. However, as there is a greater possibility of managers to manipulate the recorded earnings as explain by the earnings management, the importance of recorded earnings has been eroded. Therefore, it is essential to consider the quality of earnings over reported earnings since it communicates the true portrait of the business for the stakeholders. With this milieu this study investigates the impact of earnings quality on stock returns of listed manufacturing companies in Sri Lanka during the period of 2010 to 2015. For this purpose, the study employs accruals as to measure the quality of earnings. In addition to that the study considered whether earnings or earnings quality is more influential to determine market return and whether size of the companies matters in measuring the above impact. The findings reveal that there is no significant positive impact of earnings or earnings quality on stock returns suggesting that the proxy used is not suitable to explain the impact of earnings quality on stock return. That is may be due to the lack of investors' ability to analyze financial statements; including earnings and quality of the items and have not sufficient knowledge of the earnings quality, and institutional framework and operational bottlenecks. In addition to that, the impact of company size is not a determining factor to quantify the impact of earning and earnings quality of the Sri Lankan listed manufacturing sector.