Earnings Verifiability

Abstract

Under Statement of Financial Accounting Concepts No. 8 in the US, verifiability is one of the decision-enhancing characteristics of financial information. Verifiability is also a key contention in the long-lasting debate on fair value accounting. Nevertheless, there is relatively little archival research on verifiability, probably due to the lack of an acceptable empirical construct to measure verifiability. We propose a new measure of earnings verifiability and find empirical evidence that higher verifiability enhances earnings relevancy. Although more verifiable earnings do not imply that these earnings measures are more faithfully represented, they do lead to better decisions by users of financial statements. Interestingly, the prevalence of fair values on firms’ financial statements is associated with lower earnings verifiability.