The usefulness of the double entry constraint for predicting earnings
Ehsan Khansalar () and
Eilnaz Kashefi-Pour ()
Additional contact information
Ehsan Khansalar: Kingston University
Eilnaz Kashefi-Pour: University of Birmingham
Review of Quantitative Finance and Accounting, 2020, vol. 54, issue 1, No 3, 67 pages
Abstract In the absence of an income statement, earnings can be calculated as cash flow from operating activities (CFO) plus accruals, rather than being stated as the difference between income statement revenues and expenses. Following the study by Christodoulou and McLeay (Contemp Account Res 31:609:328. https://doi.org/10.1111/1911-3846.12038, 2014), this paper uses a system of structural regressions with a framework of two simultaneous linear models, allowing the most basic property of accounting—double entry bookkeeping—to be incorporated as a constraint. The paper aims to investigate whether the constrained seemingly unrelated regression (SUR) estimator with two simultaneous models, produces lower out-of-sample prediction errors than each standalone model. We also examine if CFO and accruals are more capable of predicting future earnings than income statement earnings and expenses. Our findings show that in predicting earnings: (1) a system of structural regressions with two constrained simultaneous models produces significantly smaller out-of-sample prediction errors than each separate regression; and (2) accruals and CFO produce smaller out-of-sample prediction errors than earnings and expenses.
Keywords: Double entry constraint; Accruals; Earnings prediction; Seemingly unrelated regression (search for similar items in EconPapers)
JEL-codes: M41 M49 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1007/s11156-018-00783-3 Abstract (text/html)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:54:y:2020:i:1:d:10.1007_s11156-018-00783-3
Ordering information: This journal article can be ordered from
Access Statistics for this article
Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee
More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla ().