External Monitoring, ESG, and Information Content of Discretionary Accruals

Abstract

Discretionary accruals reflect the management’s accounting choices made within the flexibility of accounting standards. Discretionary accruals can be used by the management to better reflect the economic value of the firm and to signal their private information about a firm’s future prospects to the market, but they can also be used opportunistically by managers. However, the prior literature documents mixed evidence related to the information content in discretionary accruals. Thus, we examine the association between discretionary accruals and analysts’ forecast dispersion to provide further evidence on the information content in discretionary accruals. Moreover, as greater external monitoring and rigorous ESG management allow less room for manager’s manipulation of discretionary accruals, we investigate whether greater external monitoring by institutional owners and higher ESG scores moderate the relationship between discretionary accruals and analysts’ disagreements on long-term EPS growth forecasts. We find a positive association between discretionary accruals and analysts’ forecast dispersion, which suggests there is low information content in discretionary accruals. Furthermore, we find that a greater concentration in institutional ownership, greater blockholders’ institutional ownership, and a positive ESG score mitigate the positive relationship between discretionary accruals and analysts’ forecast dispersion. Thus, better external monitoring and higher quality ESG enhance the information credibility of a firm’s disclosure.

Is audit committee busyness associated with earnings management? The moderating role of foreign ownership

“…Some studies used the modified Jones model (1995) and have an R 2 larger than this study, for example, Amar (2014) reported R 2 68%. However, another study reported an R 2 of less than 25% (Hong et al , 2022), which is less than that reported in this study. The result in Model 2 has an R 2 of 64.1% and an F -statistic of 73.26 at a 1% significance level.…”

“…To determine the value of DAC, this study uses the model below on the ACMD and FOWN as a moderating variable. The absolute value of DAC is better to measure the EM, as this proxy combined both income-decreasing and income-increasing (Hong et al, 2022). Controlling variables are AC size, AC independence, AC expertise, firm age, firm size and leverage; in addition to the year dummy and industry dummy, the model can be specified as follows: This study used the cash flow method to estimate total accruals.…”

Disentangling Relevance from Reliability in Value Relevance Tests

“…To facilitate as much separation between relevance and reliability as possible, we constructed a measure that acknowledges five observable indicators suggesting impaired reliability. Notably, ample literature detects earnings management using discretionary accruals (e.g., [12][13][14][15][16][17][18][19][20]). However, accrual metrics do not allow measurement of reliability apart from relevance because accruals are value-relevant accounting information.…”