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Unequal Impact of Conservatism on Accrual Measures and Drivers: Implications for the Specification of Accrual Models

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Listed:
  • José António Moreira

    () (CETE, Faculdade de Economia, Universidade do Porto)

  • Peter F. Pope

    () (ICRA, Management School, Lancaster University)

Abstract

This study makes two main contributions to the literature. Firstly, it tests empirically the relative timeliness of accrual measures and earnings components used as explanatory variables in accrual models (“accrual drivers”) regarding the impact of conservatism. Secondly, taking into account the empirical evidence on such a timeliness, it discusses intuitively potential implications for the specification of (traditional) accrual models and the quality of discretionary accrual estimates. It concludes that common accrual models, as Jones (1991), are misspecified. They have a dependent variable (accruals) asymmetrically affected by conservatism, and one or more explanatory variables that are not affected, inducing a non-systematic measurement error in estimating discretionary accruals.

Suggested Citation

  • 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.
  • Handle: RePEc:por:cetedp:0604
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    File URL: http://www.fep.up.pt/investigacao/cete/papers/dp0604.pdf
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    References listed on IDEAS

    as
    1. Thomas, Jacob & Zhang, Xiao-jun, 2000. "Identifying unexpected accruals: a comparison of current approaches," Journal of Accounting and Public Policy, Elsevier, vol. 19(4-5), pages 347-376.
    2. repec:bla:joares:v:37:y:1999:i::p:53-87 is not listed on IDEAS
    3. Ball, Ray & Shivakumar, Lakshmanan, 2005. "Earnings quality in UK private firms: comparative loss recognition timeliness," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 83-128, February.
    4. Steven Young, 1999. "Systematic Measurement Error in the Estimation of Discretionary Accruals: An Evaluation of Alternative Modelling Procedures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(7&8), pages 833-862.
    5. repec:bla:joares:v:29:y:1991:i:2:p:193-228 is not listed on IDEAS
    6. Guay, W. & Kothari, S.P. & Watts, R.L., 1996. "A Market-Based Evaluation of Discretionary-Accrual Models," Papers 96-01, Rochester, Business - Financial Research and Policy Studies.
    7. Paul Hribar, 2002. "Errors in Estimating Accruals: Implications for Empirical Research," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 105-134, March.
    8. repec:bla:joares:v:34:y:1996:i::p:107-115 is not listed on IDEAS
    9. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February.
    10. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    11. Givoly, Dan & Hayn, Carla, 2000. "The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 287-320, June.
    12. repec:bla:joares:v:33:y:1995:i:2:p:353-367 is not listed on IDEAS
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    More about this item

    Keywords

    accruals; accrual models; discretionary accruals; conservatism.;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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