Why have measures of earnings quality changed over time? A competing narrative

We contribute to the debate on the reason for the decline in earnings quality (EQ) documented by prior literature. We dissent from Srivastava (2014)’s conclusion that “each new cohort of listed firms exhibits lower earnings quality than its predecessors, mainly because of higher intangible intensity”. Instead, we argue that the downward trend in EQ measures is explained by changes in firms’ economic risk and operational efficiency associated with “broadening of the kinds of firms publicly traded” (Fama and French (2004)). The association of intangible intensity to EQ measures is spurious and disappears when controlling for the mentioned firm’s characteristics.