Skip to main content

Corporate life cycle and the accrual model: An empirical study based on Chinese listed companies

Abstract

Based on data from China’s listed companies from 1998 to 2005, this paper investigates whether the incorporation of corporate life cycle variables into the accrual model improves the model’s explanatory power. Results of the empirical study show that the inclusion of corporate life cycle variables reduces the likelihood of both type I and II errors, and it also significantly improves the explanatory power of the accrual model.

References

  1. Anthony J H, Ramesh K (1992). Association between accounting performance-measures and stock-prices: A test of the life-cycle hypothesis. Journal of Accounting and Economics, 15: 203–227

    Article  Google Scholar 

  2. Ball R, Shivakumar L (2006). The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 44(2): 207–242

    Article  Google Scholar 

  3. Ball R, Shivakumar L (2008). Earnings quality at initial public offerings. Journal of Accounting and Economics, 45: 324–349

    Article  Google Scholar 

  4. Black E L (1998). Life-cycle impacts on the incremental value-relevance of earnings and cash flow measures. Journal of Financial Statement Analysis, 4(1): 40–56

    Google Scholar 

  5. Chen K C, Yuan H (2004). Earnings management and capital resource allocation: Evidence from China’s accounting-based regulation of rights issues. Accounting Review, 79(3): 645–665

    Article  Google Scholar 

  6. Dechow P, Ge W (2006). The persistence of earnings and cash flows and the role of special items: Implications for the accrual anomaly. Review of Accounting Studies, 11(2–3): 253–296

    Article  Google Scholar 

  7. Dechow P M (1994). Accounting earnings and cash flows as measures of firm performance—The role of accounting accruals. Journal of Accounting & Economics, 18(1): 3–42

    Article  Google Scholar 

  8. Dechow P M, Dichev I D (2002). The quality of accruals and earnings: The role of accrual estimation errors. Accounting Review, 77: 35–59

    Article  Google Scholar 

  9. Dechow P M, Sloan R G, Sweeney (1995). Detecting earnings management. Accounting Review, 70(2): 193–225

    Google Scholar 

  10. Defond M L, Jiambalvo J (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting & Economics, 17(1–2): 145–176

    Article  Google Scholar 

  11. Diamond D W (1991). Monitoring and reputation—The choice between bank loans and directly placed debt. Journal of Political Economy, 99(4): 689–721

    Article  Google Scholar 

  12. Dickinson V (2007). Cash flow patterns as a proxy for firm life cycle. working paper, Fisher School of Accounting, University of Florida, available from http://ssrn.com/abstract=755804

  13. Fields T D, Lys T Z, Vincent L (2001). Empirical research on accounting choice. Journal of Accounting & Economics, 31(1–3): 255–307

    Article  Google Scholar 

  14. Francis J R, LaFond P O, Schipper K (2005). The market pricing of accruals quality. Journal of Accounting and Economics, 39(2): 295–327

    Article  Google Scholar 

  15. Gort M, Klepper S (1982). Time paths in the diffusion of product innovations. The Economic Journal, 92: 630–653

    Article  Google Scholar 

  16. Gu Z, Lee C W, Rosett J G (2005). What determines the variability of accounting accruals? Review of Quantitative Finance and Accounting, 24(3): 313–334

    Article  Google Scholar 

  17. Guay W R, Kothari S P, Watts R L(1996). A market-based evaluation of discretionary accrual models. Journal of Accounting Research, 34: 83–105

    Article  Google Scholar 

  18. Hannan M T, Freeman J H (1984). Structural inertia and organizational change. American Sociological Review, 49(2): 149–164

    Article  Google Scholar 

  19. Healy P (1996). Discussion of a market-based evaluation of discretionary accrual models. Journal of Accounting Research, 34: 107–115

    Article  Google Scholar 

  20. Healy P M, Wahlen J M (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4): 365–383

    Article  Google Scholar 

  21. Hribar P, Collins D W (2002). Errors in estimating accruals: Implications for empirical research. Journal of Accounting Research, 40(1): 105–134

    Article  Google Scholar 

  22. Jones J J (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2): 193–228

    Article  Google Scholar 

  23. Jovanovic B (1982). Selection and the evolution of industry. Econometrica, 50(3): 649–670

    Article  Google Scholar 

  24. Khan M (2008). Are accruals mispriced evidence from tests of an intertemporal capital asset pricing model. Journal of Accounting and Economics, 45(1): 55–77

    Article  Google Scholar 

  25. Kothari S P (2001). Capital markets research in accounting. Journal of Accounting and Economics, 31: 105–231

    Article  Google Scholar 

  26. Kothari S P, Leone A J, Wasley C E (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1): 163–197

    Article  Google Scholar 

  27. Larcker D F, Richardson S A (2004). Fees paid to audit firms, accrual choices, and corporate governance. Journal of Accounting Research, 42(3): 625–658

    Article  Google Scholar 

  28. Liu M M (2007). Accruals and managerial operating decisions over the firm life cycle. Working paper, Smeal College of Business, Pennsylvania State University. Available from http://ssrn.com/abstract=931523

  29. McNichols M F (2002). Discussion of the quality of accruals and earnings: The role of accrual estimation errors. Accounting Review, 77: 61–69

    Article  Google Scholar 

  30. Myers S C (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2): 147–175

    Article  Google Scholar 

  31. Peasnell K V, Pope P F, Young S (2000). Detecting earnings management using cross-sectional abnormal accruals models. Accounting and Business Research, 30(4): 313–326

    Google Scholar 

  32. Richardson S A, Sloan R G, Soliman M T, Tuna I (2005). Accrual reliability, earnings persistence and stock prices. Journal of Accounting and Economics, 39(3): 437–485

    Article  Google Scholar 

  33. Spence A M (1977). Entry, capacity, investment and oligopolistic pricing. The Bell Journal of Economics, 8(2): 534–544

    Article  Google Scholar 

  34. Spence A M (1979). Investment strategy and growth in a new market. The Bell Journal of Economics, 10(1): 1–19

    Article  Google Scholar 

  35. Spence A M (1981). The learning curve and competition. The Bell Journal of Economics, 12(1): 49–70

    Article  Google Scholar 

  36. Stickney C P, Brown P (1999). Financial Reporting and Statement Analysis: A Strategic Perspective. NY: Dryden Press

    Google Scholar 

  37. Subramanyam K R (1996). The pricing of discretionary accruals. Journal of Accounting and Economics, 22: 249–281

    Article  Google Scholar 

  38. Sweeney A P (1994). Debt-covenant violations and managers accounting responses. Journal of Accounting and Economics, 17(3): 281–308

    Article  Google Scholar 

  39. Teoh S H, Welch I, Wong T J (1998). Earnings management and the long-run market performance of initial public offerings. Journal of Finance, 53(6): 1935–1974

    Article  Google Scholar 

  40. Teoh S H, Wong T J, Rao G R (1998). Are accruals during initial public offerings opportunistic? Review of Accounting Studies, 3: 175–208

    Article  Google Scholar 

  41. Thomas J, Zhang X J (2000). Identifying unexpected accruals: A comparison of current approaches. Journal of Accounting and Public Policy, 19: 347–376

    Article  Google Scholar 

  42. Watts R L, Zimmerman J L (1990). Positive accounting theory: A ten year perspective. Accounting Review, 65(1): 131–156

    Google Scholar 

  43. Wernerfelt B (1985). The dynamics of prices and market shares over the product life cycle. Management Science, 31(8): 928–939

    Article  Google Scholar 

  44. Zhang X F (2007). Accruals, investment, and the accrual anomaly. Accounting Review, 82(5): 1333–1363

    Article  Google Scholar 

  45. 蔡 祥, 李 志文, 张 为国 (Cai Xiang, Li Zhiwen, Zhang Weiguo) (2003). 中国实证会计研究述评 (A review of the empirical accounting research in China). 中国会计与财务研究, 5(2): 155–215

    Google Scholar 

  46. 陈 信元, 江 峰 (Chen Xinyuan, Jiang Feng) (2005). 事件模拟与非正常收益模型的检验力 (Event simulation and the test power of abnormal return model). 会计研究, (7): 25–31

  47. 陈 信元, 夏 立军 (Chen Xinyuan, Xia Lijun) (2006). 审计任期与审计质量: 来自中国证券市场的经验证据 (Audit tenure and audit quality: Empirical evidence from Chinese securities market). 会计研究, (1): 44–54

  48. 陈 旭东 (Chen Xudong) (2009). 企业生命周期、 应计特征与会计稳健性研究 (Study on the Corporate Life Cycle, Accrual Characteristics and Accounting Conservatism). 成都: 西南财经大学出版社

    Google Scholar 

  49. 陈 旭东, 黄 登仕 (Chen Xudong, Huang Dengshi) (2008). 企业生命周期、 应计特征与会计稳健性 (The corporate life cycle, accrual characteristics and accounting conservatism). 中国会计与财务研究, 10(1): 1–69

    Google Scholar 

  50. 夏 立军 (Xia Lijun) (2003). 盈余管理计量模型在中国股票市场的应用研究 (Application of earnings management measuring models in the Chinese stock market). 中国会计与财务研究, 5(2): 94–154

    Google Scholar 

  51. 周 铁, 罗 燕雯, 荆 娴 (Zhou Tie, Luo Yanwen, Jing Xian) (2006). 应计利润计量偏差及对识别盈余管理的影响 (Accrual measurements errors and impact on detect earnings management). 会计研究, (6): 63–69

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Xudong Chen.

Additional information

Translated and revised from Kuaiji Yanjiu 会计研究 (Accounting Research), 2008, (7): 56–64

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Chen, X., Yang, W. & Huang, D. Corporate life cycle and the accrual model: An empirical study based on Chinese listed companies. Front. Bus. Res. China 4, 580–607 (2010). https://doi.org/10.1007/s11782-010-0112-1

Download citation

Keywords

  • accrual model
  • corporate life cycle
  • type I error
  • type II error