Entropy-Balanced Accruals

63 Pages Posted: 29 Jan 2015 Last revised: 25 Jun 2019

See all articles by Jeff L. McMullin

Jeff L. McMullin

Indiana University - Kelley School of Business - Department of Accounting

Bryce Schonberger

University of Rochester - Simon Business School

Date Written: May 30, 2019

Abstract

The goal of this study is twofold. First, we assess whether the accrual-generating process is adequately described by a linear model with respect to a range of underlying determinants examined by prior literature. On this point, we document substantial departures from linearity across the distributions of accrual determinants, including measures of size, performance, and growth. Second, 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 entropy-balanced estimates are able to detect seeded accrual manipulations in these same deciles. Our empirical analysis of accruals around new equity issuances bears out these improvements.

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 (May 30, 2019). Kelley School of Business Research Paper No. 15-31; Simon Business School Working Paper No. FR 15-01. 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 Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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