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Systematic Measurement Error in the Estimation of Discretionary Accruals: An Evaluation of Alternative Modelling Procedures

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  • Steven Young

    (Department of Accounting and Finance, Lancaster University.)

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    Abstract

    This paper evaluates the extent of predictable measurement error induced by five alternative approaches to the estimation of discretionary accruals. The source and magnitude of the error is assessed by reference to the strength of the association between the discretionary accrual estimate and proxies for the non-discretionary components of total accruals. Results indicate that discretionary accruals generated by the Healy model are associated with the highest level of predictable measurement error. While the remaining four models generate significantly lower error levels, the magnitude of error remains highly significant. Findings highlight the limitations of existing models and emphasise the need for further developments in relation to the measurement of earnings management activity. Copyright Blackwell Publishers Ltd 1999.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 26 (1999-09)
    Issue (Month): 7&8 ()
    Pages: 833-862

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    Handle: RePEc:bla:jbfnac:v:26:y:1999-09:i:7&8:p:833-862

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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    Cited by:
    1. José António Moreira & Peter F. Pope, 2006. "Unequal Impact of Conservatism on Accrual Measures and Drivers: Implications for the Specification of Accrual Models," CEF.UP Working Papers 0604, Universidade do Porto, Faculdade de Economia do Porto.
    2. Maijoor,Steven & Vanstraelen,Ann, 2002. "Earnings Management: The Effects of National Audit Environment, Audit Quality and International Capital Markets," Research Memorandum 070, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    3. José A. C. Moreira & Peter F. Pope, 2007. "Piecewise Linear Accrual Models: do they really control for the asymmetric recognition of gains and losses?," CEF.UP Working Papers 0703, Universidade do Porto, Faculdade de Economia do Porto.

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