Business strategy, earnings properties, and earnings quality

This study explores the relationship between business strategy and earnings properties, which are frequently considered as proxies of earnings quality. Specifically, we examine the implications of different strategic positionings for earnings properties that are related to earnings management, conditional conservatism, earnings persistence, and earnings smoothness. Using an international sample, our empirical results indicate that business strategy is inherently linked to these earnings properties. Firms that focus on a business strategy of continuous innovation have larger discretionary accruals, more persistent earnings, and lower earnings smoothness relative to firms that focus on a business strategy of operation efficiency. We also find some evidence for differences in conditional conservatism, although the associations are weaker and sensitive to sample composition. Our main inference is that business strategy inherently affects earnings properties.