Modified Jones Model Manipulative Accruals
factor.formula
Using the cross-sectional regression model by industry and year, the regression coefficient of non-manipulative accruals is estimated:
Substituting the coefficients obtained from the above regression into the following formula, we can calculate the Non-Discretionary Total Accruals (NDTAC):
Calculate Discretionary Total Accruals (DTAC): Total Accruals minus Non-Discretionary Accruals:
in:
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Total Accruals of stock i in period t is calculated as the current net profit minus the current operating cash flow. This indicator reflects the impact of non-cash transactions on the company's earnings and is an important part of earnings quality analysis.
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The total assets of stock i in period t-1 are used as a standardization factor to eliminate the impact of company size differences on the regression results, making the data of companies of different sizes comparable.
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The increase in operating income of stock i in period t relative to period t-1 (Change in Revenue). Changes in revenue are an important reflection of a company's operating performance and one of the drivers of accrued earnings.
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The increase in accounts receivable of stock i in period t relative to period t-1 (Change in Receivables). Changes in accounts receivable can reflect the quality of a company's revenue and whether there is aggressive revenue recognition behavior. Deducting the growth in accounts receivable from revenue growth can better estimate non-manipulative accruals.
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The total amount of fixed assets (Gross Property, Plant, and Equipment) at the end of period t for stock i. Fixed assets represent the company's investment and production capacity, and are also an important part of accrued earnings.
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The intercept term coefficient in the regression model represents the baseline level of accrued earnings determined by the inherent characteristics of the company when other factors remain unchanged.
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The coefficient of change of operating income in the regression model reflects the impact of income changes on total accrued earnings. Generally speaking, an increase in income will lead to an increase in accrued earnings.
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The coefficient of fixed assets in the regression model reflects the impact of fixed asset size on total accrued earnings. Generally speaking, companies with larger fixed asset size will have relatively higher accrued earnings.
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The residual term of the regression model represents the part of accrued earnings that cannot be explained by the model, which is considered to be the manipulative accrued earnings used by the company's management to manage earnings.
factor.explanation
This factor uses the modified Jones model to decompose total accrued earnings into non-manipulative and manipulative parts through cross-sectional regression by industry and year. The modified Jones model takes into account the impact of changes in accounts receivable on the basis of the original Jones model, so that it can better identify earnings management behavior. Manipulative accrued earnings reflect earnings adjustments made by company management for specific motives (such as meeting profit targets, tax avoidance, etc.), and are an important indicator for measuring earnings quality and accounting robustness. This indicator is usually negatively correlated with future stock returns, that is, the higher the manipulative accrued earnings of a company, the worse its future earnings performance may be. This factor can be used to identify companies that may have risks in financial reporting and serve as a negative signal for portfolio construction.