The Effect of Earnings Quality on the Returns-Earnings Relationship: Evidence from Jordan

Abstract

This study examines the returns-earnings relationship taking into consideration the quality of earnings for a sample of industrial and service Jordanian companies listed on Amman Stock Exchange over the period (2002-2012). The study uses five simple and direct measures (indicators) of earnings quality that could be used by any financial statement user. Using Ordinary Least-Squares Regression (OLS), the results show that the returns-earnings relationship has improved after sorting data based on the quality of earnings. Moreover, after adding the age of companies as a control variable results have generally improved except for some indicators. At last, earnings quality sorting was used for industrial sector companies and service sector companies each separately. The results show that returns-earnings relationship is stronger for service sector companies than for industrial sector companies in general.