Non-discretionary accruals ratio
factor.formula
Industry-year cross-sectional regression (modified Jones model):
Non-discretionary accruals ratio:
in:
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The total accrued profit of stock i in period t is equal to the difference between the cash flow from operating activities and the net profit. The calculation details are as follows: $TA_{i,t} = Net profit_{i,t} - Net cash flow from operating activities_{i,t}$.
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The total assets of stock i in period t-1 are normalized as a size factor to eliminate the impact of company size on total accruals. This indicator can improve the comparability of accruals between companies of different sizes.
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The increase in operating income of stock i in period t relative to period t-1. This variable reflects the change in the company's sales revenue and is an important factor affecting accrued profits.
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The increase in accounts receivable of stock i in period t relative to period t-1. This variable reflects the change in the company's credit sales and is the revenue-related part of accruals. In the modified Jones model, subtracting the change in accounts receivable can more accurately eliminate accruals generated by credit sales, thereby more accurately measuring non-manipulative accruals.
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The total amount of fixed assets at the end of period t for stock i. This variable represents the company's long-term investment and is another important factor affecting accrued profits. Depreciation of fixed assets also affects accrued profits.
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The coefficients obtained through industry-year cross-sectional regression represent the marginal impact of each explanatory variable on total accruals in a specific industry and year. $\epsilon_{i,t}$ is the regression residual.
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The non-manipulative accruals ratio of stock i in period t represents the portion of accruals generated by the company's normal operating activities that remains after deducting the manipulable accruals.
factor.explanation
The above calculation method is based on the modified Jones model, which decomposes total accruals into an explainable part (non-manipulative accruals) and an unexplainable part (manipulative accruals) through industry-year cross-sectional regression. The modified Jones model introduces the impact of changes in accounts receivable on the basis of the original Jones model, thereby more accurately stripping out accruals generated by credit sales. The non-manipulative accruals ratio reflects the accruals generated in the normal operating activities of the company that cannot be artificially adjusted through accounting means. Therefore, the higher the indicator is, it usually means that the company's earnings quality is higher and the more robust and sustainable the earnings are. This indicator can be used to identify companies that may inflate earnings by manipulating accruals.