Time-specific Measure: A Better Representative of Accruals?

Project: Research

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Researcher(s)

Description

Since Sloan (1996), accounting accruals have been believed to be less persistent than cash flows relating next-period earnings. The accruals he used are traditional accruals of accounting measure. Many subsequent studies extend his research using the same measure of accruals. Other independent studies have also been conducted using this measure of accruals. However, Francis and Smith (2005) show that this differential persistence between accruals and cash flows decreases by about eighty percent when accruals are calculated using the time-specific measure. If the lower persistence of accruals results from the specification problem, and the time-specific measure is a more relevant representative of accruals, the major implications of prior studies using traditional measures of accruals could be debilitated. Corporate governance is a hot issue both in research and practice these days. If some corporate governance proxy (e.g. auditor independence) or the consequence of good corporate governance (e.g. earnings quality, earnings management) is measured by accruals, the implications could be misleading when these accruals are misspecified. Thus some seminal prior studies will be revisited to check whether their main findings are robust to the use of this new accruals measure.

Detail(s)

Project number7002171
StatusFinished
Effective start/end date1/10/0722/10/10