IDEAS home Printed from https://ideas.repec.org/p/por/cetedp/0604.html
   My bibliography  Save this paper

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

Author

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
    as

    Download full text from publisher

    File URL: http://www.fep.up.pt/investigacao/cete/papers/dp0604.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Paul Hribar & Daniel W. Collins, 2002. "Errors in Estimating Accruals: Implications for Empirical Research," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 105-134, March.
    2. Guay, WR & Kothari, SP & Watts, RL, 1996. "A market-based evaluation of discretionary accrual models," Journal of Accounting Research, Wiley Blackwell, vol. 34, pages 83-105.
    3. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "The effect of international institutional factors on properties of accounting earnings," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 1-51, February.
    4. 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.
    5. Healy, P, 1996. "Discussion of a market-based evaluation of discretionary accrual models," Journal of Accounting Research, Wiley Blackwell, vol. 34, pages 107-115.
    6. 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.
    7. 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.
    8. Pope, PF & Walker, M, 1999. "International differences in the timeliness, conservatism, and classification of earnings," Journal of Accounting Research, Wiley Blackwell, vol. 37, pages 53-87.
    9. 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.
    10. 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.
    11. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    12. 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.
    13. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 193-228.
    14. 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, September.
    15. Kang, Sh & Sivaramakrishnan, K, 1995. "Issues In Testing Earnings Management And An Instrumental Variable Approach," Journal of Accounting Research, Wiley Blackwell, vol. 33(2), pages 353-367.
    16. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Juan Manuel García Lara & Beatriz García Osma & Araceli Mora, 2005. "The Effect of Earnings Management on the Asymmetric Timeliness of Earnings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(3‐4), pages 691-726, April.
    3. José A. C. Moreira, 2006. "Discretionary Accruals: The Measurement Error Induced By Conservatism," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(2), pages 115-125.
    4. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    5. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    6. Juan García Lara & Beatriz Osma & Evi Neophytou, 2009. "Earnings quality in ex‐post failed firms," Accounting and Business Research, Taylor & Francis Journals, vol. 39(2), pages 119-138.
    7. Wan, Huishan, 2013. "Does incorporating non-linearity into discretionary accrual models improve their performance?," Advances in accounting, Elsevier, vol. 29(1), pages 85-96.
    8. Juan Manuel García Lara & Beatriz García Osma & Fernando Penalva, 2009. "The Economic Determinants of Conditional Conservatism," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3‐4), pages 336-372, April.
    9. Erik Peek & Roger Meuwissen & Frank Moers & Ann Vanstraelen, 2012. "Comparing Abnormal Accruals Estimates across Samples: An International Test," European Accounting Review, Taylor & Francis Journals, vol. 22(3), pages 533-572, September.
    10. Araceli Mora Enguidanos & Juan Manuel García Lara & Beatriz García Osma & Ana Gisbert Clemente, 2004. "La Comparabilidad De La Información Contable En Europa: Efectos De La Manipulación Contable Sobre El Nivel De Conservadurismo," Working Papers. Serie EC 2004-14, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    11. 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.
    12. Jinhan Pae, 2007. "Unexpected Accruals and Conditional Accounting Conservatism," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(5‐6), pages 681-704, June.
    13. Dmitri Byzalov & Sudipta Basu, 2016. "Conditional conservatism and disaggregated bad news indicators in accrual models," Review of Accounting Studies, Springer, vol. 21(3), pages 859-897, September.
    14. Antonia Botsari & Geoff Meeks, 2008. "Do Acquirers Manage Earnings Prior to a Share for Share Bid?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(5‐6), pages 633-670, June.
    15. Nguyet T. M. Nguyen & Abdullah Iqbal & Radha K. Shiwakoti, 2022. "The context of earnings management and its ability to predict future stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 123-169, July.
    16. Vasiliki Athanasakou & Norman Strong & Martin Walker, 2009. "Earnings management or forecast guidance to meet analyst expectations?," Accounting and Business Research, Taylor & Francis Journals, vol. 39(1), pages 3-35.
    17. Ray Ball & Lakshmanan Shivakumar, 2006. "The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition," Journal of Accounting Research, Wiley Blackwell, vol. 44(2), pages 207-242, May.
    18. Loureiro, Gilberto & Silva, Sónia, 2022. "Earnings management and stock price crashes post U.S. cross-delistings," International Review of Financial Analysis, Elsevier, vol. 82(C).
    19. Sudip Datta & Mai Iskandar‐Datta & Vivek Singh, 2014. "Opaque financial reports and R2: Revisited," Review of Financial Economics, John Wiley & Sons, vol. 23(1), pages 10-17, January.
    20. K. Peasnell & P. Pope & S. Young, 2000. "Detecting earnings management using cross-sectional abnormal accruals models," Accounting and Business Research, Taylor & Francis Journals, vol. 30(4), pages 313-326.

    More about this item

    Keywords

    accruals; accrual models; discretionary accruals; conservatism.;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:por:cetedp:0604. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ana Bonanca (email available below). General contact details of provider: https://edirc.repec.org/data/fepuppt.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.