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Article
Publication date: 1 July 2005

Earnings Prediction and the Role of Accural‐Related Disclosure: International Evidence

Tony Kang

Accounting accruals are at the heart of most accounting systems. A basic premise of accrual accounting is that it provides a more timely and relevant performance measure…

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Abstract

Accounting accruals are at the heart of most accounting systems. A basic premise of accrual accounting is that it provides a more timely and relevant performance measure than cash flows through a better matching of revenues and expenses. While some prior studies suggest that managers use individual accrual‐related disclosure items in an opportunistic manner, hindering market participants’ ability to predict future firm performance, the market’s expectation about future firm performance will become more accurate and consistent under accrual accounting if the market properly uses such information to set expectations about future firm performance. Consistent with this idea, our evidence shows that the frequency of accrual‐related disclosure is positively (negatively) associated with analysts’ forecast accuracy (dispersion). We interpret this finding as the presence of more detailed accrual‐related disclosure requirements enhancing the market participants’ ability to predict earnings.

Details

Accounting Research Journal, vol. 18 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/10309610580000670
ISSN: 1030-9616

Keywords

  • Accruals
  • Accounting systems

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Article
Publication date: 23 October 2009

Accruals' persistence, accruals mispricing and operating cycle: evidence from the US

Qian Hao

The purpose of this paper is to investigate the effect of operating cycle on the differential persistence of accruals and cash flow, and the market reaction to the…

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Abstract

Purpose

The purpose of this paper is to investigate the effect of operating cycle on the differential persistence of accruals and cash flow, and the market reaction to the different components of earnings across firms with various operating cycles.

Design/methodology/approach

By examining the US public firms' earnings and the capital market reaction to different components of earnings, from 1964 to 1993, it is found that the longer the operating cycle, the lesser will be the persistent of accruals.

Findings

This result is consistent with Sloan's theory that the differential persistence of accruals is attributable to estimation errors in accruals. Moreover, the market efficiency test shows that the mispricing of accruals is greater for firms with longer operating cycle, indicating that investors fixate on earnings, while ignoring the persistence of accruals among firms with different earnings quality.

Originality/value

This paper adds to the growing literature that has begun to examine the factors affecting accrual persistence and accrual mispricing by indicating that the length of operating cycle can play a role. In addition, it provides fresh evidence that the market fixates on earnings, thus emphasizing the importance of contextual analysis of financial statement. Finally, it corroborates Sloan and Xie that estimation errors in accruals drive the lower persistence of accruals.

Details

International Journal of Accounting & Information Management, vol. 17 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/18347640911001230
ISSN: 1834-7649

Keywords

  • Earnings
  • Capital markets
  • Public sector organizations
  • United States of America

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Article
Publication date: 7 April 2015

Accrual reliability, earnings persistence, and stock prices: revisited

R. Mithu Dey and Lucy Lim

The purpose of this paper is to replicate Richardson et al.’s (2005) study on how accrual components’ reliability affects earnings persistence and whether investors…

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Abstract

Purpose

The purpose of this paper is to replicate Richardson et al.’s (2005) study on how accrual components’ reliability affects earnings persistence and whether investors anticipate the lower earnings persistence through stock return. In this study, the authors use more recent data to examine whether the previous results still hold.

Design/methodology/approach

The authors run the analysis using Richardson et al.’s (2005) design of ordinary least squares and report the results using Fama and Macbeth’s (1973) procedures.

Findings

The results corroborate Richardson et al.’s (2005) conclusions that lower reliability of total accrual (accrual components) leads to lower earnings persistence.

Originality/value

This study replicates Richardson et al. (2005) using more recent US data. The results in this paper confirm the general conclusion in the original study: less reliable accruals lead to lower earnings persistence.

Details

American Journal of Business, vol. 30 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/AJB-07-2014-0041
ISSN: 1935-5181

Keywords

  • Reliability
  • Market efficiency
  • Earnings persistence
  • Accruals
  • Capital market
  • Revisited

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Article
Publication date: 10 September 2020

The role of discretionary pension accruals in earnings management

Su-Jane Hsieh, Yuli Su and Chun-Chia Amy Chang

Managers of defined-benefit (DB) firms have considerable discretion in deriving pension costs and flexibility in cash contributions to pension plans. Pension accruals…

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Abstract

Purpose

Managers of defined-benefit (DB) firms have considerable discretion in deriving pension costs and flexibility in cash contributions to pension plans. Pension accruals occur when cash contributions differ from pension costs. The manipulable nature of pension costs and cash contributions allows managers of DB firms to manipulate pension accruals to achieve their desired earnings. We study whether DB firms with earnings management attributes (referred to as suspect DB firms) used more discretionary pension accruals (DPA) than non-suspect DB firms, especially after the passage of Sarbanes-Oxley (SOX).

Design/methodology/approach

The authors develop an aggregate measure of DPA to capture overall earnings management in pension accounting. They then employ a multivariate regression model to study whether the suspect DB firms engage in more DPA than non-suspect firms and to assess the impact of SOX on DPA for all DB firms and for suspect DB firms.

Findings

The authors find evidence that suspect firms inflate DPA to achieve their earnings goals and also that all DB firms and the suspect firms use more DPA in the post-SOX era compared to the pre-SOX period. In contrast, they observe no significant difference in real activities earnings management (REM) between suspect and non-suspect firms. In addition, neither the entire sample of DB firms nor the suspect firms display a significant change in REM after SOX.

Research limitations/implications

The samples in the study are limited to firms with defined pension plans; thus, the findings cannot be generalized to all firms. In addition, as in other empirical studies relying on models to estimate earnings management proxies, this study inherits estimation errors from Jones and Roychowdhury's models. Consequently, the impact of these estimation errors cannot be ruled out.

Practical implications

The empirical findings of the study appear that instead of deterring DB firms from engaging in pension accruals earnings management, enacting the stringent anti-fraud SOX prompts these firms to rely more on accrual-based discretionary pension rather than switch to real activities manipulation to manage earnings.

Originality/value

While many prior studies focus on the impact of managing individual pension assumptions on earnings, the authors study overall earnings management in pension accounting by developing a model to derive an aggregate measure of pension earnings management.

Details

Journal of Applied Accounting Research, vol. 22 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/JAAR-06-2019-0095
ISSN: 0967-5426

Keywords

  • Accruals earnings management
  • Pension accruals
  • Real activities earnings management
  • Pension estimates
  • Sarbanes-Oxley Act
  • G14

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Book part
Publication date: 15 October 2015

The New Public Financial Management (NPFM) and Accrual Accounting in Sri Lanka

P. W. Senarath Yapa and Sarath Ukwatte

The purpose of this paper is to analyse the reasons why Sri Lanka adopted International Public Sector Accounting Standards (IPSAS) recently. Many less developed countries…

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Abstract

Purpose

The purpose of this paper is to analyse the reasons why Sri Lanka adopted International Public Sector Accounting Standards (IPSAS) recently. Many less developed countries (LDCs) have introduced IPSAS during the recent past. However, little research has been conducted to study the New Public Financial Management and accrual accounting and their impact on LDCs.

Methodology/approach

Using a qualitative approach, the methods of this paper consist of interviews, a documentary review and participatory observation in the Ministry of Finance and Planning (MOFP) and Auditor General’s Department of Sri Lanka, and present a critical interpretation supported by the perspective of globalisation.

Findings

The findings of the research indicate that the public sector reforms and the transition from cash accounting to accrual accounting in the public sector have been strongly affected by the global pressures imposed by international agencies such as International Public Sector Accounting Standards Board (IPSASB) and the World Bank (WB). Empirical evidence shows the dysfunctional impact of globalisation in the public sector accounting standards as there are major structural issues yet to resolve. There are increasing doubts over whether the change to accrual accounting is worth the costs and the additional risks involved.

Research limitations

The results of the interviews are based on the knowledge and past experiences of interviewees. What is generalisable is an understanding of the processes and mechanisms that relate to the way the public sector accounting functions.

Originality/value

This paper adds new literature on public sector accounting in LDCs, which recognises the nexus and interests of international agencies and practice of public sector accounting.

Details

The Public Sector Accounting, Accountability and Auditing in Emerging Economies
Type: Book
DOI: https://doi.org/10.1108/S1479-356320150000015002
ISBN: 978-1-78441-662-1

Keywords

  • Public sector
  • new public financial management
  • accrual accounting
  • Sri Lanka

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Article
Publication date: 14 July 2020

Transaction-based lending and accrual quality

Stephen Gray and Arjan Premti

This study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.

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Abstract

Purpose

This study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.

Design/methodology/approach

To measure the earnings quality, following Bharath, Sunder and Sunder (2008), the authors use three measures of accrual quality and combine them into a simple parsimonious measure of accrual quality. Subsequently, the authors apply the incremental R-square approach used by Kim and Kross (2005) to determine the degree to which lenders modify their reliance on financial statement ratios when faced with low accrual quality.

Findings

Consistent with prior literature, this study shows that the cost of debt is higher when accrual quality is low. In addition, this study extends prior literature by showing that lenders decrease their reliance on income statement data to make credit decisions as accrual quality decreases.

Originality/value

This paper broadens existing literature on the pricing of information risk in capital markets by being the first to show that lenders modify their reliance on financial statement data when faced with low-quality accruals. In addition, this paper extends the findings of Billings and Morton (2002) and demonstrates to managers the futility of using accrual manipulations to obtain more favorable credit terms. Lastly, this paper aids regulators and standard setters who seek to improve the usefulness of financial statements by showing that creditors do not appear to be misled by reporting choices that lower the quality of accruals.

Details

Managerial Finance, vol. 47 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/MF-01-2019-0012
ISSN: 0307-4358

Keywords

  • Accruals
  • Accrual quality
  • Debt capital
  • Earnings management
  • Financial statements
  • Transaction-based lending
  • G10
  • G32

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Book part
Publication date: 18 September 2017

Reconciling the Conflicting Results of Prior Research on the Relation between Aggressive Book and Tax Reporting

Sarah C. Lyon

I reexamine the conflicting results in Frank, Lynch, and Rego (2009) and Lennox, Lisowsky, and Pittman (2013). Frank et al. (2009) conclude that firms can manage book…

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Abstract

I reexamine the conflicting results in Frank, Lynch, and Rego (2009) and Lennox, Lisowsky, and Pittman (2013). Frank et al. (2009) conclude that firms can manage book income upward and taxable income downward in the same period, implying a positive relation between aggressive book and tax reporting. Lennox et al. (2013) conclude the relation is negative and aggressive book reporting informs users that aggressive tax reporting is less likely. I identify four key differences in the research designs across the two studies, including measures of aggressive book reporting, measures of aggressive tax reporting, sample time periods, and empirical models. I systematically examine whether each of these differences is responsible for the conflicting results by altering the key difference while holding other factors as constant as possible. I find the relation between aggressive book and tax reporting is driven by the measure of aggressive book reporting, as the relation is positive for some subsets of firms and negative for others. Firms accused of financial statement fraud have a negative relation while nonfraud firms exhibit a positive relation. Using discretionary accruals, I also look for, but do not find a “pivot point” in the relation between aggressive book and tax reporting. I provide a better understanding of the relation between aggressive book and tax reporting by identifying research design choices that are responsible for prior results. I show that measures of both discretionary accruals and financial statement fraud are necessary to gain a more complete picture of the relation between aggressive book and tax reporting.

Details

Advances in Taxation
Type: Book
DOI: https://doi.org/10.1108/S1058-749720170000024001
ISBN: 978-1-78714-524-5

Keywords

  • Aggressive book reporting
  • aggressive tax reporting
  • book-tax relation
  • measuring book and tax reporting aggressiveness
  • financial statement fraud
  • estimated probability of fraud
  • M40
  • M41
  • M49

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Book part
Publication date: 3 September 2014

Accounting Information Quality in Latin- and North-American Public Firms

Edilson Paulo, Eliseu Martins and Luiz Felipe de Araújo Pontes Girão

We analyze the quality of accounting information reported by public firms in Latin America and United States of America.

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Abstract

Purpose

We analyze the quality of accounting information reported by public firms in Latin America and United States of America.

Methodology/Approach

To reach our objective, an exploratory and descriptive research was developed. To analyze the dimensions of accounting information quality, the operational model present in literature were applied which assess the persistence in earnings (Dechow & Schrand, 2004), the level of conservatism (Ball & Shivakumar, 2005), accounting earnings management (Pae, 2005) and accruals quality measurement (Dechow & Dichev, 2002), in a sample composed of publicly traded companies in the markets of Latin America and the North America (represented by USA), totaling 2,526 companies, from 2005 to 2011.

Findings

Our results evidenced that financial reporting of Latin-American companies are less conservative (except for Brazilian companies) and has similar level of earnings management in comparison to the North-American ones. Concerning to the quality of accruals it was observed that there are significant differences especially related to accruals of Brazilian companies.

Practical Implications

Our results suggest differences in the quality of accounting information, originated by the economic environment where the company is inserted. So, investors must be careful when they are comparing firms between these markets, because the results were different for some cases, which may lead the investors to make misallocation of his resources.

Originality/value of paper

We expanded previous literature by the use of various proxies for accounting quality, comparing firms on emerging markets with the major capital market (USA), and the crises period of time.

Details

Accounting in Latin America
Type: Book
DOI: https://doi.org/10.1108/S1479-356320140000014001
ISBN: 978-1-78441-067-4

Keywords

  • Quality of accounting information
  • persistence
  • conservatism
  • earnings management
  • accrual quality

Content available
Article
Publication date: 26 August 2020

The impact of innate accruals quality on the future market value moderated by dividend policy

Muljanto Siladjaja and Yuli Anwar

The purpose of this study is to test and prove how the quality of innate accruals can make a significant contribution to the prospect of future market value for…

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Abstract

Purpose

The purpose of this study is to test and prove how the quality of innate accruals can make a significant contribution to the prospect of future market value for manufacturing industries.

Design/methodology/approach

This research used multiple regression method by gathering all observation data on a go public company in the industrial manufacturing sector.

Findings

The results of this test can show that the dividend policy helps reduce the use of accruals to increase investor perceptions about the prospects of the company's future period, especially the value of earnings informativeness, including valid information about the actual fundamental conditions. These results reflect high innate accruals quality, so the use of low accruals, especially in reporting earnings.

Research limitations/implications

This test uses a measurement of a constant growth rate with the calculation of the indicator g in the next five-year period, and the proof has secondary data abnormalities reflecting a very high level of variation in the use of accruals. As an implication of the data that is not normal, it causes a large amount of data pruning through outlier tests. Samples that qualify for processing are 180 from 384 data.

Originality/value

By calculating the value of the dividend payout with the growth rate, the estimated future market price can be done with reasonable accuracy.

Details

Asian Journal of Accounting Research, vol. 5 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/AJAR-04-2020-0026
ISSN: 2443-4175

Keywords

  • Innate accruals
  • Future market value
  • Dividend policy

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Article
Publication date: 24 June 2020

Artificial and real income smoothing around corporate governance reforms: further evidence from Egypt

Awad Elsayed Awad Ibrahim, Tarek Abdelfattah and Khaled Hussainey

The authors examine whether managers switch from artificial income smoothing using discretionary accruals to real income smoothing around corporate governance reform in Egypt.

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Abstract

Purpose

The authors examine whether managers switch from artificial income smoothing using discretionary accruals to real income smoothing around corporate governance reform in Egypt.

Design/methodology/approach

The sample comprises 61 non-financial companies listed on the Egyptian Stock Exchange for the years 2004–2011. The authors use discretionary accruals as a proxy for artificial income smoothing and income/loss from asset sales as a proxy for real income smoothing.

Findings

The authors offer a significant contribution to accounting literature by providing new empirical evidence on the trade-off between real smoothing technique (e.g. income/loss from asset sales) and discretionary accruals around governance reform in a developing country.

Research limitations/implications

This study suffers from some limitations. First, the study sample is limited to only 338 observations. However, this is due to collecting the data manually and to the small number of listed firms during the study period. Second, the study period ended in 2011 due to the unprecedented political instability after the 2011 Egyptian people revolution. Third, although this study examines the effect of corporate governance, not all the governance aspects have been examined in the study models due to the lack of data.

Practical implications

First, the results of the total samples reveal that managers prefer real income smoothing than accruals income smoothing. This result may confirm the literature arguments on the advantages of REM methods over AEM methods. Cohen et al. (2008) find that firms switch to manage earnings using REM methods and explain that REM methods are harder to detect because they depend on operating decisions (Schipper, 1989). REM can be undertaken anytime during the year (Gunny, 2010). Besides, REM could not be deemed a violation of accounting standards or regulations (MyVay, 2006).

Originality/value

The authors offer a significant contribution to accounting literature by providing new empirical evidence on the trade-off between real smoothing technique (e.g. income/loss from asset sales) and discretionary accruals around governance reform in a developing country.

Details

Journal of Applied Accounting Research, vol. 21 no. 4
Type: Research Article
DOI: https://doi.org/10.1108/JAAR-06-2019-0100
ISSN: 0967-5426

Keywords

  • Governance reform
  • Discretionary accruals
  • Asset sales
  • Income smoothing
  • Egypt

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