The Number of Estimates in Footnotes and Accruals

65 Pages Posted: 29 Feb 2016 Last revised: 13 Jul 2021

See all articles by Huafeng (Jason) Chen

Huafeng (Jason) Chen

Fudan University - Fanhai International School of Finance (FISF)

Jason V. Chen

University of Illinois at Chicago

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Date Written: October 1, 2020

Abstract

This study quantifies the number of estimates involved in firms’ accruals and examines whether it is informative about the relation between accruals and future earnings. We measure the number of estimates using the frequency of the use of the word estimate in the qualitative portions of a firm’s Notes to the Financial Statements (footnotes). Motivated by arguments regarding the impact of estimation errors in accruals (Sloan 1996, Richardson et al. 2005), we hypothesize and find that the accruals of firms that have more estimates have a lower relation with future earnings (i.e., lower persistence) and a lower association with their past, current, and future cash flows, in the spirit of Dechow and Dichev (2002).

Keywords: textual analysis; accruals quality; accruals persistence; accrual anomaly

Suggested Citation

Chen, Huafeng (Jason) and Chen, Jason V. and Li, Feng, The Number of Estimates in Footnotes and Accruals (October 1, 2020). Available at SSRN: https://ssrn.com/abstract=2738842 or http://dx.doi.org/10.2139/ssrn.2738842

Huafeng (Jason) Chen

Fudan University - Fanhai International School of Finance (FISF) ( email )

220 Handan Road
Shanghai, 200433
China

Jason V. Chen (Contact Author)

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030
China

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