A market-based evaluation of discretionary accrual models
Article Abstract:
Five discretionary-accrual models, namely, P.M. Healy (1985), L. DeAngelo (1986), J.J. Jones (1991), Jones as modified in P.M. Dechow, R.G. Sloan and A.P. Sweeney (1995) and the industry model proposed by Dechow and Sloan, are evaluated. A simple earnings model is simplified, three managerial discretion hypotheses are specified and efficient markets are assumed as part of the evaluation. Return-earnings component regressions are examined to determine whether they generate signs and magnitudes of coefficients consistent with firm performance, opportunism or noise hypothesis. The Jones and modified Jones models are found to estimate discretionary accruals possessing attributes if accruals resulting from management opportunism or accruals enhancing earnings as a performance measure.
Publication Name: Journal of Accounting Research
Subject: Business
ISSN: 0021-8456
Year: 1996
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Discussion of a market-based evaluation of discretionary accrual models
Article Abstract:
A market-based evaluation of five discretionary accrual models was undertaken to determine the reason why managers use discretion in financial reporting. Results indicated that managers use discretion for various reasons, ranging from increasing compensation and protecting job security to communicating expectations of long-term company performance with investors and creating stockholder wealth at the expense of other stakeholders. Results also showed that even highly effective models have difficulty in parsing earnings into discretionary and nondiscretionary components. Although the findings of the evaluation have significant implications for management practice, the critical assumptions underlying the evaluation model lead to premature conclusions.
Publication Name: Journal of Accounting Research
Subject: Business
ISSN: 0021-8456
Year: 1996
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The relation between earnings and cash flows
Article Abstract:
A model of operating cash flows and the formal accounting process by which these cash flows are incorporated into accounting earnings is presented. The model implies that using earnings rather than current operating cash flows is better for predicting future operating cash flows. It can also explain the negative serial correlation in operating cash flow changes. A sample of 1,337 firms were used to test the model. Results confirmed the feasibility of the model.
Publication Name: The Journal of Accounting and Economics
Subject: Business
ISSN: 0165-4101
Year: 1998
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