Accrual-based Models Research Articles

How CSR Performance and Financial Report Quality Affect Corporate Share Prices? Case of Indonesia

Purpose: This research intends to investigate the impact of financial report quality and CSR performance on the firm share prices. Methodology/approach: The 78 firms-years observation of LQ-45 public listed companies in Indonesia from 2019 to 2020 is used in this study. The financial report quality is measured by the accrual-based model of earning management, while CSR performance is measured by the amount of CSR spending. The OLS regression is applied to test the hypotheses. Findings: The findings show that there is no effect of financial report quality on the share prices. On the other hand, CSR performance plays an important role in influencing a company’s share prices. CSR performance has a positive effect on share prices. The financial report failed to ensure that there is no existing information asymmetry within the organization. While CSR performance is a form of social-engaged activities in order to achieve social benefits and legitimation. Practical implications: In the context of legitimacy and agency theory, these findings provide fruitful insight into how the firm performance is valued by investors, which is not only based on financial performance but also based on non-financial performance. Originality/value: By providing a new measurement of CSR performance, this study is different to most existing CSR kinds of literature.

The relevance of cash flow information in predicting corporate bankruptcy in Italian private companies

This study investigates the relevance of cash flow information in predicting corpo-rate bankruptcy in Italian private companies. The results indicate that while the cash flow-based model exhibits a high predictive capacity, it is less effective than the accrual-based model. In addition, cash flow-based ratios do not improve the predictive capacity of the accrual-based model. From a theoretical perspective, this study enriches existing literature on the relevance of cash flow information in predicting corporate bankruptcy by extending the investigation to the Italian con-text, which has not yet been sufficiently studied. From a practical standpoint, it provides Italian companies with new bankruptcy prediction models and offers pre-liminary suggestions regarding the relevance that should be attributed to cash flow information within the organizational, administrative, and accounting structures that they must establish to promptly detect crises and undertake appropriate initia-tives in a timely manner to comply with the requirements of the new legislation on business crises.

A comparative analysis of Altman's Z-score and T. Jury's cash-based credit risk models with the application to the production company and the data for the years 2016-2022

Research Questions: In the present paper the author answers the following research questions: 1) What are the potential strengths of the credit risk model based on the cash flow principle? 2) What are the weaknesses of the accrual-based credit risk model? 3) What are the benefits of the combined use of both cash-based and accrual-based credit risk modeling methods when analyzing companies? Motivation: nowadays there are no researches comparing the accrual-based credit risk model to a cash-based credit risk model with the application to a production company trading its shares on Stock Exchange. However, for investors, auditors and financial institutions it is important to know if there is a difference between these two models in the interpretation of analysis results, and determination of prebankruptcy stage of the company and credit risk default. Idea: in this paper, the author has focused on the comparative analysis of the cash-based credit risk model and the accrual-based credit risk model. The author applies it to the case of a manufacturing company and compares the effectiveness of determining the probability of default using a cash-based credit risk model and an accrual-based credit risk model. Data: the data analysed is obtained from the annual reports, managerial reports and auditor’s reports of Linas Agro Group for the years 2016-2022. The company information is taken from Nasdaq Baltic where Linas Agro Group has its shares traded. Tools: mixed research methods were used, combining quantitative calculations with analysis based on qualitative information. The author elaborates on the cash-based credit risk model based on the improved Timothy Jury’s template. The accrual-based model chosen for comparison and analysis is Altman’s Z-Score model. Findings: The results of the study have shown that the cash-based model is more effective in determining credit risk and default probability. The cash-based model indicated a high-risk default for the manufacturing company in four years out of seven years, while Altman’s Z-Score showed the company to be in the moderate risk grey zone in five years out of seven, and the two last years the model indicated the company in the green zone. The author suggests to financial institutions, financial managers, and investors using a cash-based credit risk model or combination of it with the accrual-based model. Contribution: the paper contributes to the knowledge about the comparison of cash-based and accrual-based credit risk models and emphasizes their strengths and weaknesses. It helps investors, auditors, business owners, and finance professionals to make a decision about which credit risk model to use for the analysis to determine the pre-bankruptcy state of the company, avoid bad loans and improve investment decision-making. It also encourages the academic society for further research and comparison on the topics of accrual-based and cash-based credit risk models in the strive to develop the ultimate credit risk model capable to analyse the data as precisely as possible.

Corporate governance and financial reporting quality: a comparative study

PurposeThis paper aims to investigate the impact of corporate governance on financial reporting quality (FRQ) in Pakistan and the UK.Design/methodology/approachIn this paper, three accrual-based models are used to analyse FRQ for a sample of 1,550 firm-year observations, including 78 Pakistani firms and 77 UK firms, for the period 2009–2018.FindingsThe analysis shows that board size has a negative impact on FRQ while foreign ownership has a positive impact for Pakistani and UK firms. It also shows that board independence has a positive impact on FRQ of Pakistani firms, while board meetings frequency and audit committee independence have a negative impact. We make no such observation for UK firms. In addition, the analysis shows that board gender diversity and ownership concentration negatively affect FRQ of UK firms. This study makes no such observation for Pakistani firms.Research limitations/implicationsDue to the study’s focus on Pakistani and UK firms, the findings may not be generalizable to other developed and emerging economies.Practical implicationsThe findings provide valuable insight to policymakers, regulators and investors by suggesting that the impact of board composition on FRQ of both Pakistani and UK firms is weak. The findings suggest that board size and foreign ownership are the attributes that require regulatory focus to increase FRQ. The negative impact of audit committee independence on FRQ induces rethinking among the policymakers in Pakistan and calls for fully independent audit committees.Originality/valueTo the best of the authors’ knowledge, this is the first research endeavour to compare the context of a developed and an emerging economy regarding the impact of corporate governance on FRQ. It also contributes to the governance literature by using three measures of FRQ and a comprehensive set of corporate governance attributes.

Estimating accrual-based models in Poland: the time series data approach and the cross-sectional data approach

Estimating accrual-based models in Poland: the time series data approach and the cross-sectional data approach

МЕТОДЫ ОЦЕНКИ КАЧЕСТВА БУХГАЛТЕРСКОЙ ОТЧЕТНОСТИ И МОДЕЛИ ИХ ИЗМЕРЕНИЯ

The article explores individual approaches used to measure and evaluate the quality of financial state-ments: standardized assessment, accrual-based models (accrual quality), Beneise models (M-Score), in-dexes - the internal control method and the degree of accounting conservatism. The reason for the great dependence on the use of indirect measures (proxies for the quality of financial statements or stock prices) is that some of the qualities of financial statements are unobservable.

Earnings management and performance of management buyouts

PurposeThe purpose of this paper is to examine the effect of pre-acquisition earnings management on the performance of private firm management buyouts.Design/methodology/approachThe study examines 291 UK private firms acquired by their managers between 2004 and 2012. Earnings management is investigated by means of cross-sectional discretionary accruals models, and estimated discretionary accruals are regressed on performance changes in the three years following acquisition.FindingsManagement buyouts of private firms are preceded by earnings overstatement and followed by performance deterioration. Private equity sponsored firms engage less in earnings management and remain more profitable than non-sponsored buyouts. Upward earnings managers cease to outperform industry after second post-buyout year, while aggressive earnings managers do not outperform industry at all. Discretionary total accruals are inversely associated with performance changes in the three years after buyout, and explain over 4 per cent of the changes in performance.Research limitations/implicationsPertinent to the utilisation of private firms and their exemption from publishing cash flow statement, the study relies on accrual-based models for tests of earnings management.Originality/valueThe paper contributes to the mergers and acquisitions literature and value creation debate in buyouts by providing the first tests of earnings management and post-acquisition performance in private firm management buyouts.

Forecasting Corporate Bankruptcy Using Accrual-Based Models

Financial information has been widely used to design bankruptcy prediction models. All research works that have studied such models assume that financial statements are reliable. However, reality is a bit different. Indeed, firms may tend to present their financial accounts depending on particular circumstances, especially when seeking to change the perception of the risk incurred by their partners, and thus distort or alter some of them. Consequently, one may wonder to what extent such “manipulations”, called earnings management, may influence any model that relies on accounting data. This is why we study how earnings management may affect financial variables and how it can indirectly distort predictions made by failure models. For this purpose, we used a measure that makes it possible to assess potential account manipulations, and not effective manipulations. Our results show that when these distortions are measured and used with other financial variables, models are more accurate than those that solely rely on pure financial data. They also show that the improvement of model accuracy is essentially due to a reduction of type-I error—the costliest error in economic terms.

Equity valuation models and target price accuracy in Europe: Evidence from equity reports

This study examines whether European investment analysts prefer cash flow based valuation models over accrual based models, how accurate valuation models are and whether the use of cash flow based models (with or without accrual based models) improve forecast accuracy. We conduct a comprehensive content analysis of equity research reports for most of the firms on the components list of the Dow Jones Euro Stoxx 50 Index. We find that earnings multiples and the discounted cash flow (DCF) valuation models are the two most popular valuation models and the use of accrual based multiple alongside a cash flow based model improves the forecast error and this is in line with the intuition that accruals add value relevant information to cash flows. However, we also find that neither cash flow nor earnings multiples are superior to book value and return on equity (ROE) based models in terms of forecast error. Our results provide support for the use of book value and ROE based models which provide more precise forecasts and this, in turn, supports the use of accounting based models, i.e., a residual income model.

A Review of Earnings Management in China and its Implications

This paper reviews the academic literature on earnings management in China. We discuss the motivations behind the listed firms’ earnings management, and provide empirical evidence on earnings management using various accounting measures. The literature shows that earnings management occurs most often before security issuance, or when a firm is facing the risk of delisting. While non-core income was widely used to measure earnings management in China, as it is easily detected, researchers are now focusing their attentions on accrual-based models. We then explore the real causes of earnings management in China, and conclude that the two main causes are the concentrated ownership structure, and the strong political and economic connections between government and the listed companies. We review the impact of corporate governance mechanisms and government supervision on earnings management in China. Finally, we discuss implications for the regulators and make suggestions for future research.

Do Models of Discretionary Accruals Detect Actual Earnings Management via Inventory? A Comparison of General and Specific Models

This paper evaluates a large set of accrual-based models for detecting earnings management. Insight into the accrual process in a particular industry allows us to test and compare models using actual data (2066 firm years over period 1988-2004) rather than simulations. Using detailed, non-public information about inventory, which is the obvious tool for managing earnings in this industry, accruals are split into volume (nondiscretionary) and price (discretionary) components. The evaluation provides the following insights: First, working capital accrual specifications have significant problems detecting earnings management in event samples. Focusing on inventory accruals alone provides increase in power. Second, results confirm that the Jones specifications are very sensitive with respect to firm performance (earnings as well as cash flows). Third, models and designs (such as performance matching) that attempt to correct for this bias, do not perform well in general. Still, the overall results suggest that many extended Jones type models represent a noticeable improvement compared with the original Jones model. Fourth, an innovative model, tailored to the situation (industry/accrual item), outperforms models that are based on the popular Jones structure. Fifth, correlation between managed and unmanaged accruals is shown to represent a great potential source of error confirming conjectures in McNichols (2000).

Comparative Loss Recognition Timeliness Between Brazilian ADR Issuers and Non Issuers and Between American and Brazilian Accounting Systems

The article examines the differences, in terms of information quality (conditional conservatism), of the accounting reports of Brazilian ADR issuers and non issuers. We compare loss recognition timelines in the Brazilian public firms' financial statements. We also examine the demonstrations reported in the two accounting systems (BRGAAP and USGAAP), using the Reversal Transitory Components-based Model of Basu (1997) and the Accrual-based Model of Ball and Shivakumar (2005). The hypotheses consider that there are no differences in the degrees of conditional conservatism between the two groups of firms, due to contractual and institutional similarities affecting the two groups; the inexistence of incentives to modify managers' behavior by the process of cross listing; and adopting different accounting principles is not enough to motivate managers to report conservative earnings to investors. The tests confirm these hypotheses with models using panel data methods of estimation with a sample of 331 firms from 1993 to 2005. The results present low coefficients of determination and statistical significance.

The Incremental Predictive Ability of Accrual Models With Respect to Future Cash Flows

Prior studies on the incremental predictive ability of accrual models over cash flow models with respect to future cash flows have led to conflicting results. This paper presents an accrual-based cash flow prediction model based on a random walk in cash flows adjusted for the reversal of current payables and receivables. Results indicate that this simple accrual model predicts future cash flows (out-of-sample) better than models based on current cash flows alone. This paper also provides a more sophisticated accrual model by extending the model of the accrual process developed by Barth, Cram, and Nelson (2001) to include cash flow implications of growth in future sales. This more sophisticated accrual-based prediction model estimated via WLS (while pooling the prior three years of observations) predicts future cash flows better than both the simple accrual reversal model and the cash flow-based models, indicating that the accrual model contains information about future cash flow beyond the simple mechanical reversal of accruals. One explanation is that accruals may contain information regarding future sales. Consistent with this explanation, the paper finds that the accrual-based WLS model is superior to the cash flow-based model in capturing the effect of future sales on future cash flows. To determine whether the improved forecast accuracy is large enough to affect decision-making by financial statement users, the deciles of firms ranked on forecasted cash flow are compared to the deciles of firms ranked on actual future cash flow. The accrual-based model is superior to the cash flow-based model in placing firms into the correct deciles of actual future cash flow.