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Identify a conclusion from dichev's study of the quality of earnings.

a. accrual earnings are unreliable and should be replaced by operating cash flows
b. earnings should serve as a good guide to the long-run value of the firm
c. using long-term estimates in determining earnings creates abuses

User Stan Smith
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Final answer:

Dichev's study concludes that earnings reflect the long-term value of the firm but warns about the potential for manipulation in long-term estimates. It highlights the role of market expectations in influencing stock prices and suggests the importance of identifying undervalued companies.

Step-by-step explanation:

From Dichev's study on the quality of earnings, a conclusion that can be drawn is that earnings serve as a good guide to the long-run value of the firm. It suggests that while short-term earnings may be affected by various accounting practices and accruals, over a longer period, they tend to converge with the operating cash flows and thus, give a true picture of a company's financial health.

However, the study also infers that using long-term estimates for determining earnings can lead to manipulations or 'abuses', where managers might exercise judgment in a way that distorts true economic performance. This understanding complements the implication that expectations about a company's future performance, as reflected by market analysts and investors, play a critical role in determining its stock price. Therefore, the potential for a company to exceed current expectations is key to its stock doing well over time.

User JackJoe
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