Entropy-Balanced Accruals

Review of Accounting Studies, Forthcoming

63 Pages Posted: 29 Jan 2015 Last revised: 27 Oct 2019

See all articles by Jeff L. McMullin

Jeff L. McMullin

Indiana University - Kelley School of Business - Department of Accounting

Bryce Schonberger

University of Colorado at Boulder - Leeds School of Business

Date Written: October 25, 2019

Abstract

This study assesses whether the accrual-generating process is adequately described by a linear model with respect to a range of underlying determinants examined by prior literature. We document substantial departures from linearity across the distributions of accrual determinants, including measures of size, performance, and growth. To incorporate non-linear relations, we employ a recently developed multivariate matching approach (entropy balancing) to adjust for determinants in place of relying on a linear model. Entropy balancing identifies weights for the control sample to equalize the distribution of determinants across treatment and control samples. In simulations drawing random samples from deciles where a linear model displays poor fit, we find that entropy balancing significantly improves accrual model specification by reducing coefficient bias relative to linear and propensity-score matched models. Consistent with entropy balancing retaining sufficient power, we find that its estimates detect seeded accrual manipulations and explain variation in accruals around equity issuances.

Keywords: discretionary accruals; entropy balancing; propensity score matching; covariate balance; initial public offerings; seasoned equity offerings

JEL Classification: M04

Suggested Citation

McMullin, Jeff L. and Schonberger, Bryce, Entropy-Balanced Accruals (October 25, 2019). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2556389 or http://dx.doi.org/10.2139/ssrn.2556389

Jeff L. McMullin (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Bryce Schonberger

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
970
Abstract Views
4,138
rank
26,997
PlumX Metrics