Discretionary accruals (Modified Jones Model)
factor.formula
First, we conduct cross-sectional regression by industry and year to estimate the non-discretionary accrual earnings model:
Then, substitute the coefficients obtained from the above regression into the following formula to calculate non-discretionary accruals:
Finally, subtract non-discretionary accruals from total accruals to get discretionary accruals:
The meaning of each parameter in the formula is as follows:
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Total Accruals of stock i in period t. Usually calculated by the difference between net profit and cash flow from operating activities. The specific calculation method needs to be combined with the actual financial statement data. The common method is to subtract net cash flow from operating activities from net profit.
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Total assets of stock i at the end of period t-1. Standardization using total assets lagged by one period aims to eliminate the impact of differences in company size and improve horizontal comparability.
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The change in operating income of stock i in period t relative to period t-1 (Change in Revenue). This variable is used to measure the growth of the company's current revenue and is a key factor affecting accrued earnings.
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Change in Receivable: The change in receivables of stock i in period t relative to period t-1. This variable is used to measure the change in the company's accounts receivable in the current period and is the key to distinguishing between controllable accruals and non-controllable accruals.
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The total fixed assets (Property, Plant, and Equipment) of stock i at the end of period t. This variable reflects the scale of the company's fixed assets and is also one of the factors affecting accrued earnings.
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The coefficient of the constant term in the cross-sectional regression represents the portion of accruals that is related to firm size.
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The coefficient on income change in the cross-sectional regression represents the portion of accruals that is associated with changes in income.
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The coefficient of fixed assets in the cross-sectional regression represents the portion of accrued surplus related to the size of fixed assets.
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The residual term of the regression represents the part of accrued earnings that is not explained by the regression model.
factor.explanation
This factor is based on the modified Jones model. The model assumes that total accruals can be decomposed into non-discretionary accruals generated by normal operating activities and discretionary accruals actively manipulated by management. Among them, the non-discretionary accruals are partially explained by factors such as enterprise size, income changes and fixed assets, while the remaining discretionary accruals are considered to be the result of management's earnings management for specific purposes. This factor has a negative correlation with future stock returns, indicating that companies with higher discretionary accruals may have lower future returns. The difference between the original Jones model and the modified Jones model is that the non-discretionary accruals in the original Jones model do not take into account the impact of changes in accounts receivable.