Derivation of a Returns-Based Measure of Information Quality

Abstract

In this chapter, I present the development and validation of a returns-based earnings quality metric, termed e-loading. This chapter is an abbreviated version of Ecker, Francis, Kim, Olsson, and Schipper (2006).¹¹ In short, e-loading is the firm-specific slope coefficient on an information quality mimicking factor from an asset pricing regression and thus a returns-based representation of the perceived information quality.

The validity test presented here are of particular relevance to highlight the advantageousness of this metric for this work. The interested reader is directed to Ecker et al. (2006) for additional tests, all of which show consistent results with respect to the construct validity.