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Entropy-balanced accruals

Review of accounting studies, 2020-03, Vol.25 (1), p.84-119 [Peer Reviewed Journal]

Springer Science+Business Media, LLC, part of Springer Nature 2020 ;Springer Science+Business Media, LLC, part of Springer Nature 2020. ;ISSN: 1380-6653 ;EISSN: 1573-7136 ;DOI: 10.1007/s11142-019-09525-9

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  • Title:
    Entropy-balanced accruals
  • Author: McMullin, Jeff L. ; Schonberger, Bryce
  • Subjects: Accounting/Auditing ; Business and Management ; Corporate Finance ; Entropy ; Initial public offerings ; Multivariate analysis ; Public Finance
  • Is Part Of: Review of accounting studies, 2020-03, Vol.25 (1), p.84-119
  • Description: This study assesses whether the accrual-generating process is adequately described by a linear model with respect to a range of underlying determinants examined by prior literature. We document substantial departures from linearity across the distributions of accrual determinants, including measures of size, performance, and growth. To incorporate non-linear relations, we employ a recently developed multivariate matching approach (entropy balancing) to adjust for determinants in place of relying on a linear model. Entropy balancing identifies weights for the control sample to equalize the distribution of determinants across treatment and control samples. In simulations drawing random samples from deciles where a linear model displays poor fit, we find that entropy balancing significantly improves accrual model specification by reducing coefficient bias relative to linear and propensity-score matched models. Consistent with entropy balancing retaining sufficient power, we find that its estimates detect seeded accrual manipulations and explain variation in accruals around equity issuances.
  • Publisher: New York: Springer US
  • Language: English
  • Identifier: ISSN: 1380-6653
    EISSN: 1573-7136
    DOI: 10.1007/s11142-019-09525-9
  • Source: ProQuest Central
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