Early Earnings Releases and the Role of Accounting Quality

Abstract

More than half of U.S. public companies announce earnings before audit completion. We examine how accounting quality, as a measure of the ex-ante reliability of earnings, affects the decision to release earnings early. Using four proxies for accounting quality, we show that firms with higher accounting quality are more likely to release earnings before a completed audit, and that the association is stronger when market demand for timely earnings is high. We provide evidence that accounting quality remains important in the timing of earnings release even after controlling for other factors which affect earnings reliability, such as managerial ability, auditor tenure, and financial reporting problems in a prior period. Overall we emphasize the role of accounting quality in the complex process of when to release earnings relative to audit completion, and suggest that the importance of the audit in the earnings release decision varies based on firm-specific accounting quality.