The market pricing of accruals quality

By Jennifer Francis, Ryan Lafond, Per Olsson, Katherine Schipper. 2005

3,077 citations recorded by the source corpus.

We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality (AQ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals (innate AQ) versus management choices (discretionary AQ).

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/428e709d60388be37f28d71ba43e1e67fd6328b0

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In Accounting

1. Martin Walker
2. Jeong‐Bon Kim
3. Christian Leuz
4. Terry Shevlin
5. Liandong Zhang
6. Peter D. Wysocki
7. Michelle Hanlon
8. Shivaram Rajgopal

In Finance

1. Martin Walker
2. Jeong‐Bon Kim
3. Christian Leuz
4. Peter D. Wysocki
5. Shivaram Rajgopal
6. Liandong Zhang
7. K. Hussainey
8. John (Xuefeng) Jiang

In Strategy and Management

1. Christian Leuz
2. Martin Walker
3. Jeong‐Bon Kim
4. Terry Shevlin
5. Peter D. Wysocki
6. Michelle Hanlon
7. Shivaram Rajgopal
8. Omrane Guedhami

Citations in the corpus

• Digesting Anomalies: An Investment Approach (2015, methodology): “The Gompers, Ishii, and Metrick (2003) corporate governance index earns a tiny 0.03% (t =0.09), and the Francis et al. (2005) accrual quality measure earns −0.18% (t =−0.79).”
• Board of Directors and Opportunistic Earnings Management: Evidence from India (2008, methodology): “Instead of using the Jones approach to measure discretionary accruals, we use two alternative measures based on the Francis et al. (2005) accruals specification.”
• The Quality of Accounting Information in Politically Connected Firms (2011, positive): “From an empirical standpoint, a number of studies have shown that poor accrual quality results in a number of negative consequences at the firm level, including a higher cost of capital (Francis, et al., 2005), or a higher likelihood of a lawsuit.”
• Accruals Quality and Analyst Coverage (2012, neutral): “Consistent with prior research (Francis et al., 2005), we deflate all variables in Eq.”
• Geographic Proximity between Auditor and Client: How Does it Impact Audit Quality? (2012, positive): “As noted by Francis et al. (1999), it is the local engagement offices, not the”
• Anatomy of Corporate Borrowing Constraints* (2020, background): “, 2004), accrual quality (Dechow and Dichev, 2002; Francis et al., 2005), loss avoidance (Bhattacharya et al.”