Does the earnings quality matter? Evidence from a quasi-experimental setting

Investor preference for local stocks provides a quasi-experimental setting to investigate whether the market rewards firms that comply with generally accepted accounting principles. We show firms with low earnings quality trade at a premium compared to firms in compliance with accounting principles; the difference in values is greater when the role of local investor over-trading is stronger in stock price-formation, in other words for the more isolated firms. The value of the information not conveyed to the market through accounting disclosure accounts for 30% of the market-to-book. Results are robust to earnings quality definition, and show while non-local investors are sensitive to the quality of accounting information, local and better-informed investors are not. Overall, accounting quality matters. (C) 2016 Published by Elsevier Inc.