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The Number of Estimates in Footnotes and Accruals

Author

Listed:
  • Huafeng (Jason) Chen

    (Fanhai International School of Finance, Fudan University, Shanghai 200437, China)

  • Jason Victor Chen

    (University of Illinois at Chicago, Chicago, Illinois 60607)

  • Feng Li

    (Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Shanghai 200240, China)

Abstract

This study quantifies the number of estimates involved in firms’ accruals and examines whether it is informative about the relation between accruals and future earnings. We measure the number of estimates using the frequency of the use of the word estimate in the qualitative portions of a firm’s Notes to the Financial Statements (footnotes). Motivated by arguments regarding the impact of estimation errors in accruals, we hypothesize and find that the accruals of firms that have more estimates have a lower relation with future earnings (i.e., lower persistence) and a lower association with their past, current, and future cash flows.

Suggested Citation

  • Huafeng (Jason) Chen & Jason Victor Chen & Feng Li, 2024. "The Number of Estimates in Footnotes and Accruals," Management Science, INFORMS, vol. 70(1), pages 283-308, January.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:1:p:283-308
    DOI: 10.1287/mnsc.2022.4659
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