Inflation and foreign exchange raise new issues with respect to accounting representations of equity value. For example, inflation creates an earnings illusion as an artifact of the mismatching of expenses based on allocations of historical costs with current revenues in determining earnings....

Previous research argues that earnings quality, measured as the unsigned abnormal accruals, proxies for information asymmetries that affect cost of capital. We examine this argument directly in two stages. In the first stage, we estimate firms' exposure to an earnings quality factor in the...