Accrual Duration

Abstract

We define accrual duration as the length of time between an accrual and its associated cash flow. Accrual duration is inextricably linked to accrual discretion and accrual quality by the fundamentals of the accrual process—the recording of longer-duration accruals involves using longer-term estimates, which makes them relatively more discretionary and less reliable, ceteris paribus. We provide the theoretical development of this broad idea, and demonstrate several empirical applications linking accrual duration to earnings persistence, Accounting and Auditing Enforcement Releases, asset write-offs, and the observed “kink” in the earnings distribution. A major advantage of the accrual duration approach is that it is quite general, which allows us to derive a powerful new model of total accruals discretion and quality, as well as a novel measure of total accruals duration. Finally, we discuss how the accrual duration approach can shed light on numerous ongoing issues in accounting research.

Keywords: accrual duration; accrual quality; total accruals; discretionary accruals; earnings persistence; AAERs

JEL Classification: G30, M41