Explanatory power of valuation measures in corporations with different earning quality

Price is the first and the most important factor in making investment decisions in Securities Exchanges, so evaluation and estimation of the real value of a stock is very important for investors. To understand explanatory power of different valuation measures and also the relation between earnings quality and information content of valuation measures, this study uses three models rendered by Hand and Landsman (1998) in three levels: all firms, firms with high earnings quality and firms with low earnings quality. This research uses the quantity of discretionary accruals as the measure of earnings quality that is determined using modified Jones model in two periods of estimation and event. To analyze research models, information from 1277 firms-years in the period from 2001 to 2011 has been used. Also, some information from the years 2000 and 2012 has been used in order to calculate the changes in some variables as compared to the previous year and estimate changes in the next years. The results of ordinary least squares regression shows that any increase of earnings quality leads to ignorance of stock book value (BV) and dividend per share (DPS) and increase of the information content of earning per share (EPS), while the lack of high quality and reliable earnings lead to decrease of confidence to EPS in valuation process and increase of attention to more reliable measures such as BV and DPS.