Estimation Sample Selection for Discretionary Accruals Models

Frank Ecker, Jennifer Francis*, Per Olsson and Katherine Schipper
(Duke University)

We examine how the criteria for choosing estimation samples (peer firms) affect the ability to detect discretionary accruals, using several variants of the Jones (1991) model.  Researchers commonly estimate accruals models in cross-section, and define the estimation sample as all firms in the same industry. We examine whether firm size performs at least as well as industry membership as the criterion for selecting estimation samples.  For U.S. data, we find that estimation samples based on similarity in lagged assets perform at least as well as estimation samples based on industry membership at detecting discretionary accruals, both in simulations with seeded accruals between 2% and 100% of total assets and in tests examining restatement data.  For non-U.S. data, we show that industry-based estimation samples result in significant sample attrition and that estimation samples based on lagged assets perform at least as well as estimation samples based on industry membership, with substantially less sample attrition.

Jennifer Francis is the Douglas and Josie Breeden Doctoral Professor of Accounting at the Fuqua School of Business, Duke University.

She earned a B.S. in Accounting at Bucknell University, and an M.S. and Ph.D. from Cornell University. Prior to graduate school, she worked as a CPA for Price Waterhouse. Before joining the faculty at Duke, she taught at the Graduate School of Business, University of Chicago. Professor Francis has taught both core and elective classes, as well as PhD classes at Duke University. She is the winner of over a dozen awards for outstanding teaching, including the Bank of America award for contributions to teaching, research, and service.

Professor Francis’ research interests focus on the quality of financial reporting, the relevance of financial reports to investors, the role of securities’ analysts as information intermediaries, and equity valuation. Her research is published in a variety of journals, including the Journal of Accounting Research, the Journal of Accounting and Economics, and The Accounting Review. She has served in numerous capacities in the American Accounting Association, and has been a visiting scholar at a number of institutions.

Paolo Perego

Email