Idiosyncratic Shocks to Firm Underlying Economics and Abnormal Accruals
70 Pages Posted: 11 Dec 2013 Last revised: 1 Jun 2016
Date Written: May 15, 2016
Abstract
Economics challenge the specification of discretionary accrual models. Because rent-seeking firms pursue differentiated business strategies, firms in the same industry experience idiosyncratic shocks due to heterogeneous economic fundamentals and hence have different accrual generating processes. We present evidence that idiosyncratic shocks are widespread, propagate through multiple years of financial statements, and reduce accrual models’ goodness of fit. This not only affects abnormal accrual estimates for the firm experiencing shocks, but also affects measurement of abnormal accruals for other firms in the industry. We show that idiosyncratic shocks not only add noise to abnormal accruals, but can also exacerbate bias in both unsigned and signed abnormal accruals. We propose ways to reduce accrual model misspecification.
Keywords: abnormal accruals, earnings management, earnings quality
JEL Classification: G30, M41
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Good Apples, Bad Apples: Sorting Among Chinese Companies Traded in the US
By James S. Ang, Zhiqian Jiang, ...
-
Importing Accounting Quality? The Case of Foreign Reverse Mergers
By Dan Givoly, Carla Hayn, ...
-
Spillover Effect of Fraud Allegations and Investor Sentiment
By Masako N. Darrough, Rong Huang, ...
-
The Spillover Effect of Fraud Allegations Against Chinese Reverse Mergers
-
A Proclivity to Cheat: How Culture influences Illegal Insider Trading
By Bart Frijns, Aaron B. Gilbert, ...
-
Shell Games: The Long Term Performance of Chinese Reverse Merger Firms
By Charles M.c. Lee, Kevin K. Li, ...
-
Private Class Action Litigation Risk of Chinese Firms Listed in the U.S.
By Jan Jindra, Torben Voetmann, ...
-
By Burcin Col and Vihang R. Errunza
-
Internal Control Deficiency Disclosures among Chinese Reverse Merger Firms
By Juan Mao and Michael Ettredge
-
Incorporation in Offshore Financial Centers: Naughty or Nice?
By Warren Bailey and Edith X. Liu