Question: Lev in his article On the Usefulness of Earnings 1989

Lev, in his article “On the Usefulness of Earnings” (1989), pointed out the low ability of reported net income to explain variations in security prices around the release date of earnings information. Lev attributed this low value relevance of earnings to low earnings quality.

a. Define “earnings quality.” Relate your answer to the concept of an information system in single- person decision theory.
b. Suggest reasons why earnings quality may be low.
c. How might a measurement approach to financial reporting increase earnings quality, and hence the impact of earnings on security prices?

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