Revisiting the AQ Measure of Accrual Quality

• In Event: Measuring Accounting Quality

Abstract

Dechow and Dichev (DD 2002) develop a conceptual model of accrual quality, and the AQ measure that results from their empirical estimation of the model is used extensively in the accounting literature. However, DD are careful to note that their empirical estimation has measurement error in the total operating cash flows that serve as independent variables. Our study builds upon DD by developing a conceptual approach to identify this measurement error. We then provide evidence that empirically implementing our approach mitigates substantial measurement error in DD’s total operating cash flow variables. We also demonstrate the importance of mitigating this measurement error to empirical researchers who use AQ to measure accrual quality. Specifically, we provide evidence that empirically implementing our approach yields a modified measure of accrual quality that is substantially different from AQ and that can alter inferences in an actual research setting.

Authors

• Yu Li, University of Washington Bothell

• D. Shores, University of Washington

• Terry J Shevlin, University of California, Irvine