Defining, measuring, and modeling accruals: a guide for researchers

Abstract

Research on accounting accruals is pervasive. Yet the measurement and modeling of accruals has developed in an ad hoc manner, resulting in a fragmented and incomplete body of research. Our goal is to rectify this situation by (i) providing a comprehensive definition of accruals, (ii) formulating a corresponding empirical measure of accruals, (iii) offering two decompositions of our measure that encapsulate the major classes of accruals studied elsewhere, (iv) combining and expanding prior models of the fundamental determinants of accruals into one parsimonious model, and (v) identifying the primary determinants of each of the major classes of accruals. We close by providing guidance for researchers in tailoring the selection of accruals to the research question at hand.

How does size affect capital expenditures? Evidence from Borsa Istanbul

“…According to Modigliani and Miller (1958), a debt-free company can reinvest its net income and create a higher return rate for stockholders. Ceteris paribus, the company's net income will equal to the sum of current and future cash flows if management avoids discretionary accruals (Dechow et al 1998;Larson et al 2018). Capital expenditures depend on internal and external factors.…”

Quarterly Earnings, Operating Cash Flow, and Accruals in Future Performance Assessment

“…In this regard, Larson, Sloan, and Zha Giedt (2018) provide three main roles for accounting accruals: First, to capture investments related to growth in the scale of business operations. Second, to alleviate timing differences between economic events and their associated cash flows effects.…”

“…The empirical literature has also documented that firms reporting higher accruals tend to present lower subsequent earnings (Dechow et al, 2010;Larson et al, 2018). According to Lewellen and Resutek (2019), high accruals predict high subsequent sales growth but a "long-lasting drop in both profits and profitability" (Lewellen & Resutek, 2019, p. 336).…”

“…This paper follows the literature to measure and define operating accruals by using data directly from the statement of cash flows, which mitigates the error in accrual estimation (Dechow et al, 2010;Dechow & Ge, 2006;Hribar & Collins, 2002;Larson et al, 2018). Thus, accruals (accr) are the difference between quarterly earnings (earn) and quarterly cash flows from operations (cfo) reported on statement of cash flows:…”

“…In order to test the second hypothesis of this paper, additional estimations are performed using Equations 2a and 2b according to the magnitude of operating accruals by splitting the sample in the top 25% higher and the 25% lower accruals (top and bottom quartiles). The portfolio approach is widely performed in the finance and accounting literature (see, for instance: Dechow & Ge, 2006;Larson et al, 2018), usually by splitting the sample into deciles. However, due to the low number of available observations in the Brazilian market, the sample was split into quartiles, each quartile providing observation of more than 2,200 firm-quarterly observations, a number in line with international literature in the field.…”