Measuring Accruals Quality: A Theoretical and Empirical Evaluation
54 Pages Posted: 11 Feb 2019 Last revised: 14 Feb 2019
Date Written: February 12, 2019
A large body of empirical research in accounting investigates the causes and consequences of accruals quality, reaching a variety of intriguing and 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 these measures are poorly specified, lack power, suffer serious problems with correlated omitted economic characteristics and sometimes have the opposite relation to accruals quality as assumed in existing research. Collectively, our evidence casts considerable 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