Modeling Total Accruals in an International Environment: The Impact of Alternative Measures

Abstract

International researchers investigating earnings management, and standard-setters, analysts, and auditors relying upon evidence of earnings management in their deliberations, require earnings management models to appropriately classify accruals as discretionary or non-discretionary. We examine whether refining the property plant and equipment (PPE) variable in the Jones (1991) accruals model to accommodate international differences in data availability and accounting GAAP improves the model?s explanatory power. Explanatory power increases only when the model uses gross, rather than net, PPE measures. Adjustments for international accounting differences such as amortization of intangibles and asset revaluations do not improve the model?s explanatory power. This indicates that the model is robust to international settings.

JEL Classification: M41, M43, D82, C89