Question

In your opinion does public ownership of equity improve earnings quality? Discuss and provide examples.

Answer 1

Earnings Quality

Earnings Quality pertains to the validity and veracity of the reported information. Quality earnings are those that both reflect current-period performance and help users to assess future performance. Analysis of earnings quality identifies the results of management choices on financial statements and judges management's motivations, propensities and attitudes.

Does public ownership of equity improves earnings quality

  The quality of accounting information is influenced by an array of factors, most of which stem from the demand for such information for use in contractual arrangements and from the incentives and opportunities of management to manage the reported numbers. Both the demand for quality accounting information for contractual purposes and management incentives to adjust the reported earnings are likely to be influenced by whether the equity of the company is privately held or publicly traded.

The demand hypothesis holds that earnings of public equity firms are of higher quality than earnings of private equity firms due to stronger demand by shareholders and creditors for quality reporting. By expecting a regular income and safety and security by the shareholders they may contribute to the public company rather than private. Thus in my opinion public ownership of equity improves earnings quality due to incentives and opportunities of management.