A Theoretical and Empirical Analysis of Discretionary Accrual Estimation Models in Earnings Management Research

47 Pages Posted: 10 Feb 2010 Last revised: 17 Apr 2012

See all articles by Edilson Paulo

Edilson Paulo

Federal University of Paraiba

Eliseu Martins

University of São Paulo (USP)

Date Written: February 28, 2009


The main goal of this research is to verify the theoretical and empirical validity of operational models to measure discretionary accruals, which are used in the detection of accounting earnings management. Initially, a theoretical-critical analysis is presented about the specification of the operational models present in literature for discretionary accrual estimation. Based on observations about the construction of analytic-empirical models and empirical evidence from earlier studies, a new model was proposed to analyze accruals behavior and estimate discretionary accruals. This empirical-analytical study also uses bibliographic and descriptive research. The sample in this study is constituted by the group of publicly-traded companies in the North-American and Latin-American capital markets, covering the period between 1996 and 2005. The models’ specification and predictive power is analyzed through different statistical procedures. All operational discretionary accrual measurement models used to detect accounting earnings management are estimated through the pooling of independent cross sections approach for all economic environments. The model with the best predictive power is chosen by the adjusted R2 analysis, Akaike and Schwarz criteria and Voung’s Test. The results of this research suggest that the operational discretionary accrual estimation models present in current literature do not present adequate theoretical foundations and that some of these models are weakly specified, have low predictive power and are significantly affected by the economic environment. Moreover, the results prove that the operational model proposed in this study to estimate discretionary accruals for earnings management has greater power to explain accrual behavior in all economic environments under analysis.

Keywords: discretionary accruals, analytic-empirical models, earnings management

JEL Classification: M41

Suggested Citation

Paulo, Edilson and Martins, Eliseu, A Theoretical and Empirical Analysis of Discretionary Accrual Estimation Models in Earnings Management Research (February 28, 2009). Available at SSRN: https://ssrn.com/abstract=1439836 or http://dx.doi.org/10.2139/ssrn.1439836

Edilson Paulo (Contact Author)

Federal University of Paraiba ( email )

João Pessoa, Paraiba 58038-382

Eliseu Martins

University of São Paulo (USP) ( email )

Rua Luciano Gualberto, 315
São Paulo, São Paulo 14800-901

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