Contents

• Introduction
• Summary
• Critique
• Conclusion
• References

Description

Kothari et al (2000) compares in this research paper specification and power of tests based on performance matched discretionary accruals with that from traditional discretionary accrual measures such as Jones and modified Jones models. The objective of the research is to test whether performance matched discretionary accruals approach is powerful enough at estimating discretionary accruals. Their contention that the reason to conduct the research stems from the simple accrual, cash flow and earnings model which shows that working capital accruals increase in sales growth and earnings. This means that if performance exhibits momentum then accruals would be non-zero. Although, a detailed simulation of evidence on alternative measures of discretionary accruals is done, the attempt to use performance matched discretionary accruals as a measure of discretionary accruals needs exhaustive research taking into account other industrial factors. It fails to take into account the inherent errors present in estimated total accruals using the balance sheet approach. The research paper at best is a pointer to further research and study with a guided approach taking into account other factors like cash flows, size, year, industry and not just returns on investments.