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| Author: | Dechow, P. M. Dichev, I. D. |
| Title: | The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors |
| Journal: | Accounting Review
2002 : VOL. 77:SUPPL, p. 35-70 |
| Index terms: | EARNINGS ESTIMATION ERRORS QUALITY ACCOUNTING |
| Language: | eng |
| Abstract: | This paper suggests a new measure of one aspect of the quality of working capital accruals and earnings. One role of accruals is to shift or adjust the recognition of cash flows over time so that the adjusted numbers (earnings) better measure firm performance. However, accruals require assumptions and estimates of future cash flows. The authors argue that the quality of accruals and earnings is decreasing in the magnitude of estimation error in accruals. The authors derive an empirical measure of accrual quality as the residuals from firm- specific regressions of changes in working capital on past, present, and future operating cash flows. The authors document that observable firm characteristics can be used as instruments for accrual quality. |
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