國
立 政 治 大 學
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N a tio na
l C h engchi U ni ve rs it y
V. MEASURING DISCRETIONARY ACCRUALS
Data Selection
The listed company’s financial data is retrieved from Chinese Stock Market and Accounting Research (CSMAR) database. Company’s data consists of Shanghai stock exchange and Shenzhen stock exchange where each stock market is divided into A share and B share, respectively. Panel B shows the total number of listed company’s data during 2011-2013 is 1663 and each financial data is quarterly accumulated during a fiscal year.
1The data includes only non-financial company and excludes some company that enters in the IPO during 2010-2014. Each industries are classified by CSMAR code and separated into 17 groups. The codes and the results for the classification are shown in the Panel B of Appendix 1.
North American financial data consists of 2834 listed-companies collected via Compustat. The data is also classified into 14 groups, which are consistent with Chinese industries groups in order to compare two countries. However, there are three industries are not shown on the Panel C due to the different classification method between CSMAR and 2GICS. It can be seen from the Panel C of Appendix 1.
Decomposition of Total Accrual
The accruals accounting is a simple method to display earnings growth on financial statement. The method in decomposing accruals into discretionary and non-discretionary accruals is used to generate more accurate conclusion from arbitrary
1 Financial company’s financial statement style and accounting item differs from other industries. Because high EM is observed around IPO period thereby, the data excluded some company that entered IPO from 2009 to 2012.
2 GICS sector and group codes are used for the industry classification in North America.
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management of accruals in general. In my research the total accrual (ACC) is calculated by net income minus operating cash flow.
Accrual-Based Model
i. The modified Jones model
Dechow (1995) revealed that the change of sales will include discretionary earnings in the Jones model. Because total sales is consisted by pure sales earnings and accrued account. Therefore, deducting account receivables from sales is needed to explain non-discretionary accruals since all independent variables should have power to explain the non-discretionary accruals in total accruals. The inverse lagged total asset variable indicates the size of individual companies and PPE accounts for the depreciation cost as the non-current accruals.
(1)
𝑇𝐴𝐴𝐶𝐶𝑖𝑡𝛼0=constant variable and others are coefficients.
ii. Yoon (2006) model
Except for the sales transactions, Yoon (2006) model considers operating accounts and non-operating accounts in detecting EM. Because the model assumed that Korean companies will be intended not only to delay payment but also to
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increases frequency of gathering receivable when they want to manipulate earnings.
They revealed that Korean companies are more likely to use the operating accounts if their income increases. On the contrary, the income decreasing companies are intended to use non-current accounts.1 They decomposed current accruals into receivable, inventory, payable and other current accruals as well as non-current accruals into depreciation expense, bad debt expense, retirement benefits expenses, losses from the disposition of assets or redemption of liabilities, gains from the disposition of assets or redemption of liabilities and other non-current accruals.2 Yoon (2006) mentioned that the model has multicollinearity due to the high correlation between first and second independent variables. It is shown on the table 2 and 3. Because of the unavailable data in China the second EXP variable include only cost of goods sold and the third independent variable is substituted into impairment loss and gain in this study.
(𝛥𝐼𝑀𝑃𝑖𝑡) represents the change of the impairment losses and gains in year t.
1 In my research, depreciation expense is included in the model as a Non-current accrual because other non-current accruals are less available from research data.
2 According to the VIF and correlation result from the table, multicollinearity must be considered in Yoon and Miller model. The strong correlation between sales and cost of goods sold can be seen. It may be a serious issue to apply this model. By Paul (2006), the model need to be omitted one of the highly correlated variables from the model because you cannot know the relationship between dependent variable and independent variables while including multicollinearity.
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Yoon (2006) model is created for the study of Korean companies. Figure 1 shows that the change of impairment loss and gain is quite different between 2011~2012 and 2012~2013 in China. Moreover, the change of inventory is larger than North America.
It is because the price reverse is implemented under different financial regulation system. If the company uses CAS 2006, they are no longer able to reverse the impairment loss and gain. On the contrary, if the company uses ASBE, they can reverse the price from the impairment loss to the fair value. Secondly, the change of inventory is shown much higher level that can be seen from Figure 1 because a company can choose the FIFO, the LIFO, the weighted average cost method or the specific identification method to assign the actual cost of inventories under ASBE.
But the LIFO is not allowed under the CAS 2006. On the balance sheet data, inventories are measured at the lower of cost and net realizable value”, according to Balong (2015). Thus, including both accounting items should be considered for the new model for the study of EM in China.
In addition Bernard (1996) and McNichols (2001) mentioned that “EM by working capital accruals receivable, inventory and some non-operating components should be considered in the change of sales. It will be crucial to deduct necessary variables when the study investigates a particular industry such as personal computer, oil and dresser industry when these components caused large part of earnings management.” Especially, manufacturing industry occupy the largest number of IPO companies in China, absence of those working capital accruals components for EM will cause the omitted variable problem.
(3)
𝐴𝐶𝐶𝑅𝐸𝑉𝑖𝑡∆𝐼𝑀𝑃𝑖𝑡 represents impairment loss and gain in year t less impairment loss and gain in year t − 1
∆𝐼𝑁𝑉𝑖𝑡 represents inventory in year t less inventory in year t − 1
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國立 政 治 大 學