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The impact of a heterogeneous accrual-generating process on empirical accrual models
Nicholas Dopuch, Washington University
Raj Mashruwala, Washington University
Chandra Seethamraju, Mellon Capital Management
Tzachi Zach, Washington University in St. Louis
ABSTRACT. The typical approach to estimating accrual models assumes that firms in the same industry have a homogeneous accrual generating process. In this paper, we examine this assumption. First, we argue that the relation between accruals and sales changes is more complex than portrayed by existing empirical models. In addition to sales changes, accruals are also affected by inventory and credit policies. Second, we provide evidence that the assumption of a uniform accrual-generating process is violated in industries whose firms’ accrual determinants are highly dispersed. Third, we document some implications of violating the assumption of a uniform accrual-generating process. Firms in industries with high variations in accrual determinants are likely to have large absolute abnormal accruals. We show that the increase in the absolute level of abnormal accruals over time is attributed, in part, to the increased heterogeneity in industries with respect to firms’ accrual-generating processes.
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