Viewing Discretionary Accruals through the Univariate Lens: A Conditional Heteroscedastic Mean-Variance Approach

Posted: 18 Nov 2016 Last revised: 18 Oct 2017

See all articles by Albert Mensah

Albert Mensah

HEC Paris - Accounting and Management Control Department

André Aroldo Freitas De Moura

FGV - EAESP

Date Written: December 15, 2016

Abstract

On a firm-by-firm basis, we apply the univariate conditional heteroscedastic (UCH) mean-variance modeling technique – hereafter called ‘UCH Model’ – to propose a new way to decoupling a firm’s discretionary from non-discretionary accruals. Exploiting the intuition that linear dependence in accruals embodies all plausible accruals determinants, what the UCH Model essentially does is it kills any linear dependence in accruals estimation errors to isolate firm-specific shocks to accruals reporting so that ‘model misspecification’ and ‘low test power’ concerns – known to have plagued existing accruals models – are mechanically eliminated. Validation tests reveal that this new discretionary accruals measure appeals to economic theories (i.e. ‘smoothing’ and other managerial intents) largely popularized in literature. While this measure substantially co-moves with existing measures, we show that the UCH Model outperforms classical models on several grounds aside those captioned above. We therefore encourage accounting researchers to apply this methodology as well in slicing other accounting variables.

Keywords: Discretionary Accruals, Theory-Based and Mechanical Models, Univariate Conditional Heteroscedastic (UCH) Model, Managerial Intents

JEL Classification: M4, M40, M41, C22, C5, C52

Suggested Citation

Mensah, Albert and De Moura, André Aroldo Freitas, Viewing Discretionary Accruals through the Univariate Lens: A Conditional Heteroscedastic Mean-Variance Approach (December 15, 2016). Available at SSRN: https://ssrn.com/abstract=2871761 or http://dx.doi.org/10.2139/ssrn.2871761

Albert Mensah (Contact Author)

HEC Paris - Accounting and Management Control Department

Jouy-en-Josas
France

HOME PAGE: http://https://www.hec.edu/en/faculty-research/faculty-directory/faculty-member/mensah-albert

André Aroldo Freitas De Moura

FGV - EAESP ( email )

São Paulo
Brazil

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