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http://ssrn.com/abstract=986611
 
 

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The Impact of a Heterogeneous Accrual-Generating Process on Empirical Accrual Models


Nicholas Dopuch


Washington University in Saint Louis - John M. Olin Business School

Raj Mashruwala


University of Calgary - Haskayne School of Business

Chandra Seethamraju


Franklin Templeton Investments

Tzachi Zach


Ohio State University (OSU) - Fisher College of Business

February 24, 2011

Journal of Accounting, Auditing and Finance, Forthcoming

Abstract:     
The cross-sectional approach that is typically used to estimate accrual models implicitly assumes that firms within the same industry have a homogeneous accrual generating process. In this paper, we examine this implicit assumption along three dimensions. First, we argue that the relation between working capital accruals and changes in sales is more complex than portrayed by existing empirical accrual models. In addition to sales changes, accruals are also affected by accrual determinants such as firms’ inventory and credit policies. Second, we provide evidence that the assumption of a uniform accrual-generating process is violated in industries whose firms’ accrual determinants are highly dispersed. Third, we document some implications of violating the assumption of a uniform accrual-generating process. Firms in industries with high variations in accrual determinants are likely to have large absolute abnormal accruals. We show that the previously-documented increase in the absolute level of abnormal accruals over time could be attributed, in part, to the increased heterogeneity in industries with respect to their accrual-generating processes.

Number of Pages in PDF File: 44

Keywords: accrual models, earning management

JEL Classification: M41, M43, C31

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Date posted: May 17, 2007 ; Last revised: February 27, 2011

Suggested Citation

Dopuch, Nicholas and Mashruwala, Raj and Seethamraju, Chandra and Zach, Tzachi, The Impact of a Heterogeneous Accrual-Generating Process on Empirical Accrual Models (February 24, 2011). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=986611

Contact Information

Nicholas Dopuch
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4564 (Phone)
314-935-6359 (Fax)
Raj Mashruwala
University of Calgary - Haskayne School of Business ( email )
2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
403-220-4332 (Phone)
Chandrakanth Seethamraju
Franklin Templeton Investments ( email )
Multi Asset Strategies
P.O. Box 997152
San Mateo, CA 95899-7152
United States
Tzachi Zach (Contact Author)
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

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