The success of the Jones model has inspired a long line of research on earnings management that utilizes it. In this paper, I augment the Jones and performance-adjusted Jones models by incorporating three measures from financial statements: abnormal beginning noncash working capital, working capital intensity, and historical depreciation rates. In a number of scenarios including loss avoidance and seasoned equity offerrings, I show that unexpected accruals based on the proposed model evince less bias and higher power in testing earnings management compared to those based on the existing models. The proposed accruals model displays the advantages of both the cross-sectional and the time-series Jones models, but overcomes their shortcomings.Recent research in empirical accounting has raised questions about the usefulness of price models, and how this tool can be used properly given its economic and econometric problems. Chapter 2 first identifies the essential distinctions between the price and return models, and the situations in which a price model is advantageous. An alternative method of estimating price models is then developed through minimizing the symmetrized relative pricing error (LRPE) Compared to the conventional methods of deflating by book value of equity (BVE), lagged price, or the price itself, the LRPE regression has several advantages: (1) The estimates are economically more meaningful and substantially more accurate. Comparisons using real data show that conventional methods waste 75% of the sample relative to LRPE (2) The predicted price from the proposed method better captures the intrinsic value of a firm. I find that a hedge portfolio based on LRPE regression gives higher returns (3) The relative pricing error, as a measure of the value relevance of accounting information, produces intuitive conclusions, while R 2 doesn't. These results suggest that LRPE regression can contribute significant refinements to empirical research utilizing the price models.
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