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Accruals, Cash-Flows and Tobin’s q : An Investment Perspective on Firm Accruals

Listed author(s):
  • Christian Calmès


    (Département des sciences administratives, Université du Québec (Outaouais), Chaire d'information financière et organisationnelle, ESG-UQAM, Laboratory for Research in Statistics and Probability, LRSP)

  • Denis Cormier


    (Département de finance, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM)

  • Francois Racicot


    (Département des sciences administratives, Université du Québec (Outaouais), Chaire d'information financière et organisationnelle, ESG-UQAM, et Laboratory for Research in Statistics and Probability, LRSP)

  • Raymond Théoret


    (Département de stratégie des affaires, Université du Québec (Montréal), Chaire d'information financière et organisationnelle, ESG-UQAM, et Université du Québec (Outaouais))

Following Zhang (Accounting Review, 2007) we cast firm accruals in terms of short-term investment. Since many studies consider accruals as a smoothed measure of cash flows, we first adopt Zhang specification and augment the standard Jones model with a cash-flow variable. Second, if accruals are indeed a form of short-term investment they should also be influenced by firm’s performance as measured by Tobin’s q. Consequently we propose a new version of the accrual model including a proxy for Tobin’s q. Given that accounting data and Tobin’s q are generally measured with errors, we also introduce a new estimation method based on a modified version of the Hausman artificial regression, featuring an optimal weighting matrix composed of higher moments instrumental variable estimators. Our results suggest that all the key parameters of the accrual models are indeed systematically biased with measurement errors. More importantly, our findings largely qualify Zhang’s conjecture on accruals, as both cash-flows and Tobin’s q are found strongly significant regressors of firm accruals. Relatedly we find that the Tobin’s q augmented model better isolate discretionary accruals so that the residuals of the equation are particularly well-suited to forecast stock returns.

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Paper provided by Département des sciences administratives, UQO in its series RePAd Working Paper Series with number UQO-DSA-wp012011.

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Length: 40 pages
Date of creation: 21 Sep 2010
Handle: RePEc:pqs:wpaper:012011
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