Underlying profits and financial reporting quality in Australia

This study examines the Australian Securities Exchange (ASX( 200 listed firms that reported underlying profits from the year 2009 to 2012 as to whether the underlying profits reflect financial reporting quality. We examine financial reporting quality using both accounting-based earnings quality and market-based quality. When underlying profits are related to earnings management, we find that the underlying profit is positively related to earnings management. The results of accounting-based earnings quality suggest that underlying profits reported as opportunistic, as can mislead investors. The underlying profits have not the relationship with current stock returns. The results suggest that although the underlying profit can mislead investors, it has not influenced the market-based valuation of firms.