Simulation evidence on the properties of alternative measures of working capital accruals: new evidence from the UK

Izadi Zadeh Darjezi, Javad, Choudhury, Homagni and Nazarian, Alireza (2017) Simulation evidence on the properties of alternative measures of working capital accruals: new evidence from the UK. International Journal of Accounting and Information Management, 25 (4). pp. 378-394. ISSN 1834-7649

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Abstract

Accounting information quality is fundamental to various stakeholders including investors and standard-setters. Given the multi-dimensionality of accounting information, the existing literature has pre-dominantly relied on an approach based on the modified DD model – a model first proposed by Dechow and Dichev (2002) and modified by Bushman et al (2011), to examine accounting information quality. This paper assesses the specification and explanatory powers of the DD and modified DD models by empirically examining data on UK listed firms over the period 2000-2013. Using panel regression methods, we examine accruals quality based on firm-specific regressions of working capital accruals on one-period lagged, current, and one-period lead cash flows from operations. We find that adding additional explanatory variables on firm characteristics add additional explanatory power to the DD model to the extent to which accruals map into cash flow insights based on the UK data. This study empirically well fits with the internal workings of cash flows. As investors fixate only on accounting earnings, they may fail to reflect fully on information contained in cash flow components and working capital accruals of current and future earnings.

Item Type: Article
Additional Information: © Emerald Publishing Limited 2017
Uncontrolled Keywords: Cash Flow, Modified DD model, Working Capital Accruals
Subjects: Business and finance > Accounting and finance
Business and finance > Accounting and finance > Asset pricing
Business and finance > Accounting and finance > Market based accounting research
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Depositing User: Javad Izadi Zadeh Darjezi
Date Deposited: 19 Jun 2017 10:05
Last Modified: 13 Oct 2017 13:31
URI: http://repository.uwl.ac.uk/id/eprint/3457

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