Accruals, Cash-Flows and Tobin’s q: An Investment Perspective on Firm Accruals

Christian Calmès (), Denis Cormier (), François-Éric Racicot () and Raymond Théoret ()
Additional contact information
Denis Cormier: Département de finance, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM
Raymond Théoret: Département de stratégie des affaires, Université du Québec (Montréal), Chaire d'information financière et organisationnelle, ESG-UQAM, et Université du Québec (Outaouais)

RePAd Working Paper Series from Département des sciences administratives, UQO

Abstract: Following Zhang (Accounting Review, 2007) we cast firm accruals in terms of short-term investment. Since many studies consider accruals as a smoothed measure of cash flows, we first adopt Zhang specification and augment the standard Jones model with a cash-flow variable. Second, if accruals are indeed a form of short-term investment they should also be influenced by firm’s performance as measured by Tobin’s q. Consequently we propose a new version of the accrual model including a proxy for Tobin’s q. Given that accounting data and Tobin’s q are generally measured with errors, we also introduce a new estimation method based on a modified version of the Hausman artificial regression, featuring an optimal weighting matrix composed of higher moments instrumental variable estimators. Our results suggest that all the key parameters of the accrual models are indeed systematically biased with measurement errors. More importantly, our findings largely qualify Zhang’s conjecture on accruals, as both cash-flows and Tobin’s q are found strongly significant regressors of firm accruals. Relatedly we find that the Tobin’s q augmented model better isolate discretionary accruals so that the residuals of the equation are particularly well-suited to forecast stock returns.

Keywords: Discretionary accruals; Earnings management; Investment; Measurement errors; Higher moments; Instrumental variable estimators. (search for similar items in EconPapers)
JEL-codes: C12 D92 M41 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2010-09-21
New Economics Papers: this item is included in nep-acc and nep-bec
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.repad.org/ca/qc/uq/uqo/dsa/accruals201101.pdf First version, 2010 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.repad.org:80 (No such host is known. )

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pqs:wpaper:012011

Access Statistics for this paper

More papers in RePAd Working Paper Series from Département des sciences administratives, UQO Contact information at EDIRC.
Bibliographic data for series maintained by Christian Calmes ().