On the Stewardship and Valuation Implications of Accrual Accounting Systems


  • Accepted by Haresh Sapra. We appreciate helpful comments from Ray Ball, Eva Labro, Haijin Lin, two anonymous referees, participants in the 2012 JAR conference, and participants in workshops at UC Berkeley, Oklahoma State University, Ohio State University, University of Chicago, Rice University, University of Southern Denmark, University of Pennsylvania, and the 2007 UNC/Duke Fall camp.


In this paper we explore the role of accruals in determining “earnings quality” from both a stewardship and a valuation perspective. We show that the valuation and stewardship qualities of accrual accounting are maximized by either an “aggressive” or a “conservative” accrual strategy. Furthermore, accrual strategy choices can be delegated to management as it does not benefit by implementing a strategy that is not in the best interests of the shareholders. We also investigate the implications of accrual strategies for standard empirical measures of “earnings quality”: regression coefficients and R2s from price-earnings and market-to-book regressions. We show that such measures respond differently, and in some cases adversely, to the kind of strategies that make accounting constructs more correlated with the underlying economic activities of firms.