Measuring Accruals Quality: A Theoretical and Empirical Evaluation
58 Pages Posted: 11 Feb 2019 Last revised: 11 Apr 2019
Date Written: April 8, 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 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: Suggested Citation