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http://ssrn.com/abstract=55767
 
 

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The Pricing of Discretionary Accruals


K.R. Subramanyam


University of Southern California - Leventhal School of Accounting



Abstract:     
This paper examines if the market attaches value to discretionary accounting choices. Discretionary accruals are computed by using a cross-sectional variation of the Jones [1991] technique. The results of return association tests and tests using P/E ratios indicate that under the maintained hypothesis that the Jones technique is able to correctly decompose accruals into the discretionary and non- discretionary components the market attaches value to discretionary accruals. This is consistent with two alternative scenarios: (1) discretionary accounting choices arise from managerial opportunism and are value irrelevant and the pricing of discretionary accruals connotes market mispricing arising either because of functional fixation or information asymmetry (2) managers convey private information through discretionary accruals and the market properly prices them. Further tests are undertaken to investigate if management uses its discretion to improve the value relevance of earnings. There is evidence of pervasive income smoothing which improves the ability of reported earnings to approximate the long-term trend in profitability. There is also evidence that discretionary accruals predict future earnings/cash-flows individually and collectively with other components of income.

JEL Classification: M40, G12

working papers series


Not Available For Download

Date posted: July 31, 1995  

Suggested Citation

Subramanyam, K.R., The Pricing of Discretionary Accruals. Available at SSRN: http://ssrn.com/abstract=55767

Contact Information

K.R. Subramanyam (Contact Author)
University of Southern California - Leventhal School of Accounting ( email )
Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)
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