Do the Notes to the Financial Statements Provide Information about the Degree of Subjectivity in Accruals?

56 Pages Posted: 29 Feb 2016 Last revised: 17 Jan 2019

See all articles by Huafeng (Jason) Chen

Huafeng (Jason) Chen

Tsinghua University - PBC School of Finance

Jason V. Chen

University of Illinois at Chicago

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Date Written: January 9, 2019

Abstract

Accruals incorporate subjective estimates about future cash flows, cash flow deferrals, depreciation and amortization, and fair value estimates. We examine whether the qualitative disclosures in a firm’s Notes to the Financial Statements (hereafter footnotes) provide information about its accruals subjectivity. We measure accruals subjectivity using the frequency of estimate-related words in the footnotes. Motivated by Sloan (1996) and Richardson et al. (2005), we find that the accruals of firms with greater subjectivity exhibit a lower correlation with future earnings and have lower association with their past, current, and future cash flows in the spirit of Dechow and Dichev (2002). We further document that the likelihood of meeting or beating the analyst consensus earnings forecast increases with accruals subjectivity. Lastly, we find no relation between the degree of accruals subjectivity and the accrual anomaly. Overall, our evidence suggests that the footnotes contain significant information about accruals subjectivity.

Keywords: textual analysis; accruals quality; accruals persistence; accrual anomaly

Suggested Citation

Chen, Huafeng (Jason) and Chen, Jason V. and Li, Feng, Do the Notes to the Financial Statements Provide Information about the Degree of Subjectivity in Accruals? (January 9, 2019). Available at SSRN: https://ssrn.com/abstract=2738842 or http://dx.doi.org/10.2139/ssrn.2738842

Huafeng (Jason) Chen

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Jason V. Chen (Contact Author)

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030
China

Register to save articles to
your library

Register

Paper statistics

Downloads
335
rank
87,333
Abstract Views
1,226
PlumX Metrics