This paper suggests a new method to estimate the quality of total accruals. The role of accruals is to mitigate the timing problem between cash realizations and earning recognitions. We derive an empirical measure of accrual quality as the residuals from firm-specific regressions of total accruals on future cash flow realizations. To define the lags during which total accruals may work on future cash flows, we use intrinsic value of equity as infinite valuation of discounted future cash flows. We further document that observable firm characteristics and non-operation activities can be used as instruments of accrual quality.
展开▼
