The Stewardship and Valuation Implications of Accrual Accounting Systems

Journal of Accounting Research, Forthcoming

59 Pages Posted: 29 Nov 2012

See all articles by George Drymiotes

George Drymiotes

Texas Christian University

Thomas Hemmer

Rice University - Jesse H. Jones Graduate School of Business

Date Written: October 31, 2012

Abstract

In this paper we explore the role of accruals in determining “earnings quality” from both a stewardship and a valuation perspective. We show that the valuation and stewardship qualities of accrual accounting are maximized by either an “aggressive” or a “conservative” accrual strategy. Furthermore, accrual strategy choices can be delegated to management as it does not benefit by implementing a strategy that is not in the best interests of the shareholders. We also investigate the implications of accrual strategies for standard empirical measures of “earnings quality”: regression coefficients and R-squares from price-earnings and market-to-book regressions. We show that such measures respond differently, and in some cases adversely, to the kind of strategies that make accounting constructs more correlated with the underlying economic activities of firms.

Keywords: Accrual reversal, incentive compensation, stewardship, valuation, earnings quality

JEL Classification: D80, G34, M40

Suggested Citation

Drymiotes, George and Hemmer, Thomas, The Stewardship and Valuation Implications of Accrual Accounting Systems (October 31, 2012). Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2169234

George Drymiotes (Contact Author)

Texas Christian University ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817 257 5448 (Phone)

Thomas Hemmer

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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