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The Impact of a Heterogeneous Accrual-Generating Process on Empirical Accrual Models

44 Pages Posted: 17 May 2007 Last revised: 27 Feb 2011

Nicholas Dopuch

Washington University in St. Louis - John M. Olin Business School

Raj Mashruwala

University of Calgary - Haskayne School of Business

Chandra Seethamraju

Franklin Templeton Investments

Tzachi Zach

Ohio State University (OSU) - Fisher College of Business

Date Written: February 24, 2011

Abstract

The cross-sectional approach that is typically used to estimate accrual models implicitly assumes that firms within the same industry have a homogeneous accrual generating process. In this paper, we examine this implicit assumption along three dimensions. First, we argue that the relation between working capital accruals and changes in sales is more complex than portrayed by existing empirical accrual models. In addition to sales changes, accruals are also affected by accrual determinants such as firms’ inventory and credit policies. Second, we provide evidence that the assumption of a uniform accrual-generating process is violated in industries whose firms’ accrual determinants are highly dispersed. Third, we document some implications of violating the assumption of a uniform accrual-generating process. Firms in industries with high variations in accrual determinants are likely to have large absolute abnormal accruals. We show that the previously-documented increase in the absolute level of abnormal accruals over time could be attributed, in part, to the increased heterogeneity in industries with respect to their accrual-generating processes.

Keywords: accrual models, earning management

JEL Classification: M41, M43, C31

Suggested Citation

Dopuch, Nicholas and Mashruwala, Raj and Seethamraju, Chandra and Zach, Tzachi, The Impact of a Heterogeneous Accrual-Generating Process on Empirical Accrual Models (February 24, 2011). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=986611

Nicholas Dopuch

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4564 (Phone)
314-935-6359 (Fax)

Raj Mashruwala

University of Calgary - Haskayne School of Business ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
403-220-4332 (Phone)

Chandrakanth Seethamraju

Franklin Templeton Investments ( email )

Multi Asset Strategies
P.O. Box 997152
San Mateo, CA 95899-7152
United States

Tzachi Zach (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

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