nach oben

Review of Accounting Studies

Erschienen in:

01.06.2014

Measuring discretionary accruals: are ROA-matched models better than the original Jones-type models?

verfasst von: Edmund Keung, Michael S. H. Shih

Erschienen in: Review of Accounting Studies | Ausgabe 2/2014

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

Discretionary accruals estimated from Jones-type models are elevated or depressed for firms with extreme performance. Kothari et al. (J Acc Econ 39:163–197, 2005) propose performance matching to address the issue, that is, to difference discretionary accruals estimated from Jones-type models for treatment and control firms matched on current ROA. This study shows (1) performance matching will systematically cause discretionary accruals of either sign to be underestimated, and (2) the measurement error will be negatively correlated with the true discretionary accruals. As a result, using discretionary accruals estimated with performance matching to test whether certain events induce earnings management will increase the frequency of Type II errors, and using them as the dependent or an independent variable in regression analysis will bias the regression coefficient toward zero. The results of our empirical tests are consistent with these predictions.

Vorheriger Artikel Do corporations manage earnings to meet/exceed analyst forecasts? Evidence from pension plan assumption changes

Nächster Artikel Owner liability and financial reporting information as predictors of firm default in bank loans

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

Ayers et al. (2006) and Dechow et al. (2012) both argue that performance matching increases noise in the discretionary accruals estimate.

For any study with a skewed sample there is also a chance that the sample skewness is instead caused by the firms’ genuine good or poor performance or earnings management for other purposes. In that case, performance matching would be desirable to reduce the chance of false inferences. Since the researcher can never be sure what causes the sample to be skewed, one can never say for sure whether performance matching is desirable for any study with a skewed sample.

Kothari et al. (2005) argue that good performance induces firms to take more normal accruals, stating “working capital accruals increase in forecasted sales growth and earnings because of a firm’s investment in working capital to support the growth in sales” (p. 165).

Discretionary accruals are expressed as a percentage of lagged total assets because Jones-type models scale all the variables by lagged total assets.

We follow Kothari et al. (2005) and calculate ROA as reported earnings scaled by lagged total assets.

PM in DA–PM denotes performance matching.

NP in DA–NP denotes no performance matching.

It is common for researchers to use regression residuals as proxies for discretionary accruals. The mean of regression residuals is zero.

See the footnote of Table 4 in their paper for a description of how the control firm is chosen.

Calculating accruals using the income statement approach requires cash flow data. Firms started reporting cash flow data after Statement of Financial Accounting Standards (SFAS) No. 95 was issued in 1987.

We define industries by two-digit SIC codes.

The t statistic for each sample equals $ \overline{DA} /(s(DA)/\sqrt N ) $, where $ \overline{DA} $ is the sample mean of discretionary accruals estimates, s(DA) is the sample standard deviation of the discretionary accruals estimates, and N is the sample size.

It is unsurprising that the measurement error of the original Jones model is often also negative (positive) for positive (negative) seed levels. Following prior studies, we estimate discretionary accruals by regression. Positive (negative) seeded discretionary accruals cause the regression residuals of the treatment firms to be higher (lower) than those of the other (“clean”) firms. But the magnitudes of the treatment firms’ regression residuals often will be lower than that of the seed because regression minimizes the sum of squares of the residuals.

Discretionary accruals estimated with performance matching (DA–PM) are the difference between two variables. The standard deviation of DA-PM may be high or low, depending on the correlation between the two variables. Specifically, the variance of DA-PM equals σ _x ² + σ _y ² − 2σ_xy, where σ _x ² is the variance of discretionary accruals estimate of the treatment firm, σ _y ² is that of the control firm, and σ_xy is the covariance of the two estimates. If we assume σ_xy equals zero and σ _x ² = σ _y ² , the variance of DA–PM would be 2σ _x ² , or twice the variance of discretionary accruals estimated with no performance matching. The standard deviation of DA–PM would be $ \sqrt 2 $σ_x.

Results are unchanged when Q₄ is not included as an independent variable.

They also investigate whether estimated discretionary accruals differ between firms residing in other pairs of adjacent bins of earnings, earnings changes, and earnings surprises. We do not replicate those tests in our study. .

For the prior year earnings benchmark, EM_t equals 1if 0 ≤ ΔX_t < 0.01 and 0 if −0.01 ≤ ΔX_t < 0.00, where ΔX_t is the change in net income from year t − 1 to t divided by the market value of equity at the end of year t − 2. For the analyst earnings forecast benchmark, EM_t equals 1 if $0 ≤ FE_t < $0.01 and 0 if −$0.01 ≤ FE_t < $0.00, where FE_t is year t’s actual earnings per share minus the most recent analyst forecast prior to the earnings announcement (based on data in unadjusted I/B/E/S Detail History file). FE is rounded to the nearest penny.

They tabulate the change in test results caused by performance matching for only a forward looking model.

It is critical that the mechanism by which the reduction in power occurs be known, for two reasons. First, the model can be improved only if its problems are fully understood. Second, without knowing why the model lacks power, the users are likely to attribute any loss in power caused by performance matching to chance and continue to adopt performance matching as a standard procedure.

Abarbanell, J., & Lehavy, R. (2003). Can stock recommendations predict earnings management and analysts’ earnings forecast errors? Journal of Accounting Research, 41, 1–31.CrossRef

Ali, A., Chen, T., & Radhakrishnan, S. (2007). Corporate disclosures by family firms. Journal of Accounting and Economics, 44, 238–286.CrossRef

Ayers, B. C., Jiang, X., & Yeung, P. (2006). Discretionary accruals and earnings management: An analysis of pseudo earnings targets. The Accounting Review, 81, 617–652.CrossRef

Blouin, J., Grein, B., & Rountree, B. (2007). An analysis of forced auditor change: The case of former Arthur Andersen clients. The Accounting Review, 82(3), 621–650.CrossRef

Botsari, A., & Meeks, G. (2008). Do acquirers manage earnings prior to a share for share bid? Journal of Business Finance and Accounting, 35, 633–670.CrossRef

Cahan, S. F., & Zhang, W. (2006). After Enron: Auditor conservatism and ex-Andersen clients. The Accounting Review, 81(1), 49–82.CrossRef

Cohen, D., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50, 2–19.CrossRef

Dechow, P., Hutton, A., Kim, J., & Sloan, R. (2012). Detecting earnings management: A new approach. Journal of Accounting Research, 50, 275–334.CrossRef

Dechow, P., Sloan, R., & Sweeney, A. (1995). Detecting earnings management. The Accounting Review, 70, 193–225.

DeFond, M., & Park, C. (2001). The reversal of abnormal accruals and the market valuation of earnings surprises. The Accounting Review, 76, 375–404.CrossRef

Ecker, F., Francis, J., Olsson, P., & Schipper, K. (2011). Peer firm selection for discretionary accrual models. Working Paper, Duke University.

Francis, J., Hanna, J., & Vincent, L. (1996). Causes and effects of discretionary asset write-offs. Journal of Accounting Research, 34(Supplement), 117–134.

Francis, J., & Yu, M. (2009). Big 4 office size and audit quality. The Accounting Review, 84(5), 1521–1552.CrossRef

Holthausen, R., Larcker, D., & Sloan, R. (1995). Annual bonus schemes and the manipulation of earnings. Journal of Accounting and Economics, 19, 29–74.CrossRef

Jo, H., & Kim, Y. (2007). Disclosure frequency and earnings management. Journal of Financial Economics, 84, 561–590.CrossRef

Jones, J. (1991). Earnings management during import relief investigation. Journal of Accounting Research, 29, 193–228.CrossRef

Kothari, S., Leone, A., & Wasley, C. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163–197.CrossRef

Larcker, D. F., Richardson, S., & Tuna, I. (2007). Corporate governance, accounting outcomes, and organizational performance. The Accounting Review, 82(4), 963–1008.CrossRef

Lawrence, A., Minutti-Meza, M., & Zhang, P. (2011). Can Big 4 versus Non-Big 4 differences in audit-quality proxies be attributed to client characteristics? The Accounting Review, 86(1), 259–286.CrossRef

Louis, H., Robinson, D., & Sbaraglia, A. (2008). An integrated analysis of the association between accrual disclosure and the abnormal accrual anomaly. Review of Accounting Studies, 13, 23–54.CrossRef

Matsumoto, D. (2002). Management’s incentives to avoid negative earnings surprises. The Accounting Review, 77, 483–514.CrossRef

Menon, K., & Williams, D. (2004). Former audit partners and abnormal accruals. The Accounting Review, 79(4), 1095–1118.CrossRef

Prawitt, D. F., Smith, J., & Wood, D. (2009). Internal audit quality and earnings management. The Accounting Review, 84(4), 1255–1280.CrossRef

Titel: Measuring discretionary accruals: are ROA-matched models better than the original Jones-type models?
verfasst von: Edmund Keung
Michael S. H. Shih
Publikationsdatum: 01.06.2014
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 2/2014
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-013-9262-7

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 2/2014

Does the midpoint of range earnings forecasts represent managers’ expectations?

Valuation-driven profit transfer among corporate segments

The risk-relevance of securitizations during the recent financial crisis

Evidence from impending bankrupt firms that long horizon institutional investors are informed about future firm value

Tournaments of financial analysts

How does earnings management influence investor’s perceptions of firm value? Survey evidence from financial analysts