On the Stewardship and Valuation Implications of Accrual Accounting Systems

In this paper we explore the role of accruals in determining "earnings quality" from both a stewardship and a valuation perspective. We show that the valuation and stewardship qualities of accrual accounting are maximized by either an "aggressive" or a "conservative" ac...

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Bibliographic Details
Published in:Journal of accounting research 2013-05, Vol.51 (2), p.281-334
Main Authors: DRYMIOTES, GEORGE, HEMMER, THOMAS
Format: Article
Language:English
Subjects:
Accounting
Accrual basis accounting
Business valuation
Corporate finance
Earnings
Earnings management
Studies
Valuation
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Summary:In this paper we explore the role of accruals in determining "earnings quality" from both a stewardship and a valuation perspective. We show that the valuation and stewardship qualities of accrual accounting are maximized by either an "aggressive" or a "conservative" accrual strategy. Furthermore, accrual strategy choices can be delegated to management as it does not benefit by implementing a strategy that is not in the best interests of the shareholders. We also investigate the implications of accrual strategies for standard empirical measures of "earnings quality": regression coefficients and R2s from price-earnings and market-to-book regressions. We show that such measures respond differently, and in some cases adversely, to the kind of strategies that make accounting constructs more correlated with the underlying economic activities of firms.
ISSN:0021-8456
1475-679X
DOI:10.1111/joar.12000