The Review of Accounting Studies journal has accepted a paper coauthored by Eccles School Professor of Accounting Ed Owens. The paper, titled “Accrual Duration,” was coauthored by Ilia Dichev an accounting professor from Emory University.
According to professor Owens, accounting researchers frequently study issues that require measurement of how well a firm’s reported accounting numbers reflect the actual economic activity of the firm (i.e., a firm’s “accounting quality”). One of the most common ways researchers measure a firm’s accounting quality is by measuring the association between the firm’s reported “accruals” and cash flows (i.e., “accrual quality”), because choices embedded in the recording of accruals are a key area where managerial discretion is applied to financial reporting. Indeed, accruals arise any time there is a business transaction where the booking of revenues or expenses are separated in time relative to their associated cash flows. For example, when a firm purchases a building, the cash outflow happens immediately, but the expense associated with the building is not booked until the firm depreciates the building, which continues many years after the cash outflow, based on managerial assumptions regarding the useful life of the building and other factors.
In the study, Owens and Dichev developed a new and improved methodology for measuring accrual quality by explicitly factoring in the key insight that longer time separations between accruals and their associated cash flows (i.e., longer “accrual duration”) provide more room for managerial discretion. They show that their duration-based measure of accrual quality provides improved measurement of a firm’s accounting quality, which will help future research better identify numerous issues of practical relevance.
The publication date has yet to released. To read the journal, click here.