Final answer:
Confirmatory value is essential to earnings quality as it allows investors to validate their assessments of a company's performance. It aids in improving financial information's relevance and reliability, and is crucial for stock market analysts and investors for making informed decisions.
Step-by-step explanation:
"Confirmatory value is central to the concept of earnings quality" because it allows investors to verify or change their prior assessments of a company's performance. This is closely tied to the relevance and reliability of the financial information. Confirmatory value provides a way for investors to assess the accuracy of their initial predictions and, if necessary, make adjustments. It is a form of feedback that adds to the usefulness of financial statements and helps maintain the integrity of financial reporting.
Stock market analysts and individual investors rely on confirmatory value as they conduct research to predict stock price movements. The confirmatory value plays a significant role in investment decisions, as it facilitates the evaluation of companies' past and present performance, contributing to the prediction of future success.
Confirmatory value also intersects with issues of imperfect information, as illustrated by the analogy of an employer hiring a candidate. Just as confirmatory value helps investors validate their assessments, employers use various signals like education and references to confirm their expectations about a potential employee's quality.