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A Synthesis of Accrual Quality and Abnormal Accrual Models: An Empirical Implementation

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  • Jinhan Pae

Abstract

Dechow and Dichev's (2002) accrual quality model suggests that the Jones (1991) abnormal accrual model can be improved with the inclusion of past, current, and future operating cash flows. A problem with the empirical implementation of this synthesis is that the augmented accrual model requires future operating cash flow information. I propose an equivalent accrual model that is not subject to the “peek ahead” bias and further takes into account the reversal of past accruals. The proposed model improves the explanatory power of the Jones accrual model and makes a difference in inferences about abnormal accruals of firms with accounting restatements and the market mispricing of abnormal accruals.

Suggested Citation

  • Jinhan Pae, 2011. "A Synthesis of Accrual Quality and Abnormal Accrual Models: An Empirical Implementation," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 18(1), pages 27-44.
    • Handle: RePEc:taf:raaexx:v:18:y:2011:i:1:p:27-44
    DOI: 10.1080/16081625.2011.9720872
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    1. Frederic S. Mishkin, 1983. "A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models," NBER Books, National Bureau of Economic Research, Inc, number mish83-1, January.
    2. Frederic S. Mishkin, 1983. "Introduction to "A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models"," NBER Chapters, in: A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models, pages 1-6, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Yan-Jie Yang & Qian Long Kweh & Ruey-Ching Lin, 2014. "Earnings quality of Taiwanese group firms," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 21(2), pages 134-156, June.

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