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Using unstructured and qualitative disclosures to explain accruals

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  • Frankel, Richard
  • Jennings, Jared
  • Lee, Joshua

Abstract

We examine the usefulness of support vector regressions (SVRs) in assessing the content of unstructured, qualitative disclosures by relating MD&A-based SVR-accrual estimates (MD&A accruals) to actual accruals. We find that MD&A accruals explain a statistically and economically significant portion of firm-level accruals and identify more persistent accruals. We find that the explanatory power of MD&A accruals is higher for more readable 10-Ks, thereby providing evidence for the construct validity of the readability measures. To highlight the flexibility of the SVR method, we apply it to other dependent variables and disclosures. We find that MD&A-based cash-flow forecasts produced by SVR predict next period’s cash flows. We apply SVR to conference call transcripts and find accruals estimates have similar explanatory power to MD&A accruals. Finally, the explanatory power of MD&A accruals increases between 1994 and 2013.

Suggested Citation

  • Frankel, Richard & Jennings, Jared & Lee, Joshua, 2016. "Using unstructured and qualitative disclosures to explain accruals," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 209-227.
  • Handle: RePEc:eee:jaecon:v:62:y:2016:i:2:p:209-227
    DOI: 10.1016/j.jacceco.2016.07.003
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    References listed on IDEAS

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    Cited by:

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    2. Claudine Mangen & Alexia Paduano & Bianca Paduano & Jessica Hadzurik & Juliano Leggio & Kayla Russo, 2020. "Smoke and Mirrors? Disclosures in the Marijuana Industry in Canada," Accounting Perspectives, John Wiley & Sons, vol. 19(3), pages 149-179, September.
    3. Matthew Bamber & Santhosh Abraham, 2020. "On the “Realities” of Investor‐Manager Interactivity: Baudrillard, Hyperreality, and Management Q&A Sessions†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 1290-1325, June.
    4. Iatridis, George Emmanuel & Pappas, Kostas & Walker, Martin, 2022. "Narrative disclosure quality and the timeliness of goodwill impairments," The British Accounting Review, Elsevier, vol. 54(2).
    5. Hoberg, Gerard, 2016. "Discussion of using unstructured and qualitative disclosures to explain accruals," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 228-233.
    6. Rjiba, Hatem & Saadi, Samir & Boubaker, Sabri & Ding, Xiaoya (Sara), 2021. "Annual report readability and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 67(C).
    7. John Donovan & Jared Jennings & Kevin Koharki & Joshua Lee, 2021. "Measuring credit risk using qualitative disclosure," Review of Accounting Studies, Springer, vol. 26(2), pages 815-863, June.
    8. Xi Chen & Yang Ha (Tony) Cho & Yiwei Dou & Baruch Lev, 2022. "Predicting Future Earnings Changes Using Machine Learning and Detailed Financial Data," Journal of Accounting Research, Wiley Blackwell, vol. 60(2), pages 467-515, May.
    9. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    10. Richard Frankel & Jared Jennings & Joshua Lee, 2022. "Disclosure Sentiment: Machine Learning vs. Dictionary Methods," Management Science, INFORMS, vol. 68(7), pages 5514-5532, July.
    11. Chad R. Larson & Richard Sloan & Jenny Zha Giedt, 2018. "Defining, measuring, and modeling accruals: a guide for researchers," Review of Accounting Studies, Springer, vol. 23(3), pages 827-871, September.
    12. Li, Ken, 2022. "Textual fundamentals in earnings press releases," Advances in accounting, Elsevier, vol. 57(C).
    13. Mushtaq, Rizwan & Gull, Ammar Ali & Shahab, Yasir & Derouiche, Imen, 2022. "Do financial performance indicators predict 10-K text sentiments? An application of artificial intelligence," Research in International Business and Finance, Elsevier, vol. 61(C).

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    More about this item

    Keywords

    M40; M41; Textual analysis; Support vector regressions; Disclosure; Accruals;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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