Accruals Quality And Its Influencing Factors

This paper investigates how to evaluate the accruals quality and the factors which have impact on the accruals quality. One function of accounting accruals is to measure the profit which has not been received in the form of cash, so the investors could use this information to predict the future cash flow and price the security properly. The procedure in assumption and estimation for accruals inevitably causes errors, and the management has incentive to manipulate the accruals to maximize their wealth. It will damage the function of accruals as a signal to release information to help the investors. It is valuable to link the accruals quality to the stability of errors in accruals of every company during several years. If the errors in accruals of a company fluctuate slightly in the past several years, the investors can estimate the errors of accruals of this year with more certainty, so the accruals quality is high. If the errors in accruals of a company fluctuate seriously, the investors face more uncertainty when they assess the errors in accruals of this year, so the accruals quality is lower. The corporate governance structure and the operating condition have grate influence on accruals quality. The company with perfect governance structure would have more power to prevent the management from earning management, so the accruals quality might be higher. If there is more uncertainty in the operating condition, the accounting estimation and assumption may contain more errors, and it means lower accruals quality.Using the data of Chinese listed companies from 1999 to 2005, we estimate the errors in accruals for every listed company and calculate the stand deviation of errors for every company. This parameter can represent the accruals quality according to our analysis. We investigate the factors which influence the accruals quality and we get 3 main conclusions. 1. The corporate governance structure has impact on the accruals quality; The accruals quality is higher when the listed company is owned by state or the company has a large director board or the management holds more percentage stocks or the director board has more percentage of independent directors. 2. The relationship between the percentage of the largest shareholders and accruals quality is an inverse U shape, that is to say when the percentage of the largest shareholder reach a certain point the accruals quality is the highest. 3. The operating condition could help us evaluate accruals quality precisely. The more uncertainty in the operating condition, the lower the accruals quality will be. We found the variance of the earnings, the variance of the accruals and the lever of the accruals can serve as instrument variables which could help the investors evaluate accruals quality conveniently and precisely. These conclusions...