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Estimation sample selection for discretionary accruals models

Author

Listed:
  • Ecker, Frank
  • Francis, Jennifer
  • Olsson, Per
  • Schipper, Katherine

Abstract

We examine how the criteria for choosing estimation samples affect the ability to detect discretionary accruals, using several variants of the Jones (1991) model. Researchers commonly estimate accruals models in cross-section, and define the estimation sample as all firms in the same industry. We examine whether firm size performs at least as well as industry membership as the criterion for selecting estimation samples. For U.S. data, we find estimation samples based on similarity in lagged assets perform at least as well as estimation samples based on industry membership at detecting discretionary accruals, both in simulations with seeded accruals between 2% and 100% of total assets and in tests examining restatement data and AAER data. For non-U.S. data, we find industry-based estimation samples result in significant sample attrition and estimation samples based on lagged assets perform at least as well as estimation samples based on industry membership, both in simulations and in tests examining German restatement data, with substantially less sample attrition.

Suggested Citation

  • Ecker, Frank & Francis, Jennifer & Olsson, Per & Schipper, Katherine, 2013. "Estimation sample selection for discretionary accruals models," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 190-211.
  • Handle: RePEc:eee:jaecon:v:56:y:2013:i:2:p:190-211
    DOI: 10.1016/j.jacceco.2013.07.001
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    References listed on IDEAS

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    1. David F. Larcker & Scott A. Richardson, 2004. "Fees Paid to Audit Firms, Accrual Choices, and Corporate Governance," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 625-658, June.
    2. Albuquerque, Ana, 2009. "Peer firms in relative performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 69-89, October.
    3. Brickley, James A. & Zimmerman, Jerold L., 2010. "Corporate governance myths: Comments on Armstrong, Guay, and Weber," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 235-245, December.
    4. repec:bla:joares:v:29:y:1991:i:2:p:193-228 is not listed on IDEAS
    5. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    6. Bernard, Victor L. & Skinner, Douglas J., 1996. "What motivates managers' choice of discretionary accruals?," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 313-325, October.
    7. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
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    Citations

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    Cited by:

    1. Carosi, Andrea, 2016. "Do local causations matter? The effect of firm location on the relations of ROE, R&D, and firm SIZE with MARKET-TO-BOOK," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 388-409.
    2. Baschieri, Giulia & Carosi, Andrea & Mengoli, Stefano, 2016. "Does the earnings quality matter? Evidence from a quasi-experimental setting," Finance Research Letters, Elsevier, vol. 19(C), pages 146-157.
    3. repec:eee:ecosys:v:42:y:2018:i:1:p:151-163 is not listed on IDEAS
    4. repec:eee:mulfin:v:41:y:2017:i:c:p:23-46 is not listed on IDEAS
    5. Mao, Yaping & Renneboog, Luc, 2015. "Do managers manipulate earnings prior to management buyouts?," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 43-61.
    6. repec:eee:jaecon:v:64:y:2017:i:1:p:15-36 is not listed on IDEAS
    7. Hui, Kai Wai & Nelson, Karen K. & Yeung, P. Eric, 2016. "On the persistence and pricing of industry-wide and firm-specific earnings, cash flows, and accruals," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 185-202.
    8. Biggerstaff, Lee & Cicero, David C. & Puckett, Andy, 2015. "Suspect CEOs, unethical culture, and corporate misbehavior," Journal of Financial Economics, Elsevier, vol. 117(1), pages 98-121.

    More about this item

    Keywords

    Discretionary accruals; Earnings management; Peer firms; Discretionary accruals models;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

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