Measuring Accruals Quality: A Theoretical and Empirical Evaluation

58 Pages Posted: 11 Feb 2019 Last revised: 11 Apr 2019

See all articles by Alexander Nezlobin

Alexander Nezlobin

University of California, Berkeley - Haas School of Business

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Jenny Zha Giedt

George Washington University - School of Business

Date Written: April 8, 2019

Abstract

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 lack power and suffer serious problems with correlated omitted economic characteristics. We also find that measures based on earnings ‘smoothness’ appear to have the opposite relation to accruals quality from that assumed in some 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, quality, earnings, smoothness, power, specification

JEL Classification: M41, C12

Suggested Citation

Nezlobin, Alexander and Sloan, Richard G. and Zha Giedt, Jenny, Measuring Accruals Quality: A Theoretical and Empirical Evaluation (April 8, 2019). Available at SSRN: https://ssrn.com/abstract=3301083 or http://dx.doi.org/10.2139/ssrn.3301083

Alexander Nezlobin

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Richard G. Sloan

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Jenny Zha Giedt (Contact Author)

George Washington University - School of Business ( email )

Washington, DC 20052
United States

HOME PAGE: http://www.jennyzha.com

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