Measuring Accruals Quality: A Theoretical and Empirical Evaluation
54 Pages Posted: 11 Feb 2019 Last revised: 21 Mar 2019
Date Written: March 16, 2019
A large body of empirical research in accounting investigates the causes and consequences of accruals quality, reaching numerous influential conclusions. Yet little work has been done to systematically validate the underlying measures of accruals quality. We provide the first comprehensive evaluation of popular measures of accruals quality. We find that most of these measures often lack power and suffer serious problems with correlated omitted economic characteristics. Certain measures also appear to have the opposite relation to accruals quality as assumed in existing research. Collectively, our evidence casts doubt on the conclusions of previous research. We close by providing guidelines for conducting improved tests of accruals quality.
Keywords: accruals, earnings quality, earnings persistence, earnings smoothness
JEL Classification: M41
Suggested Citation: Suggested Citation