Measuring discretionary accruals: are ROA-matched models better than the original Jones-type models?

Edmund Keung () and Michael S. H. Shih ()
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Edmund Keung: National University of Singapore
Michael S. H. Shih: University of Windsor

Review of Accounting Studies, 2014, vol. 19, issue 2, No 7, 736-768

Abstract: Abstract Discretionary accruals estimated from Jones-type models are elevated or depressed for firms with extreme performance. Kothari et al. (J Acc Econ 39:163–197, 2005) propose performance matching to address the issue, that is, to difference discretionary accruals estimated from Jones-type models for treatment and control firms matched on current ROA. This study shows (1) performance matching will systematically cause discretionary accruals of either sign to be underestimated, and (2) the measurement error will be negatively correlated with the true discretionary accruals. As a result, using discretionary accruals estimated with performance matching to test whether certain events induce earnings management will increase the frequency of Type II errors, and using them as the dependent or an independent variable in regression analysis will bias the regression coefficient toward zero. The results of our empirical tests are consistent with these predictions.

Keywords: Earnings management; Performance matching; Jones-type models (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11142-013-9262-7

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