Review of Quantitative Finance and Accounting, 24: 313–334, 2005
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.
What Determines the Variability of Accounting
Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA 15213, Tel.: (412) 268-3585;
Fax: (412) 268-6837
CHI-WEN JEVONS LEE
A.B. Freeman School of Business, Tulane University, New Orleans, LA 70118; School of Economics and Manage-
ment, Tsinghua University, Beijing, China
JOSHUA G. ROSETT
Department of Economics/Accounting, Claremont McKenna College, Claremont, CA 91711
Abstract. The variability of accounting accruals provides a measure of the normal level of managers’ accounting
discretion and has important implications for event studies of earnings management. We examine how this measure
is related to the economic factors including both ﬁrm characteristics and attributes of the disclosure environment.
We show that the variability of accruals is related to ﬁrm size, leverage, variability of cash ﬂows, operating cycle,
growth, and other factors. Signiﬁcant industry differences and temporal patterns are also found.
Keywords: variability of accruals, accounting discretion, earnings management
JEL Classiﬁcation: M41, M43, C21
The study of accrual-based earnings management and, more generally, earnings quality
requires a good understanding of the properties of accounting accruals. Although the litera-
ture has explored the mean properties in great depth, there has been limited attention to the
variance properties of accounting accruals.
The purpose of this paper is to study how the
variability of accounting accruals differs across ﬁrms and across time, what ﬁrm charac-
teristics and attributes of the disclosure environment are related to accrual variability, and
how variability analysis can shed light on the growing literature on earnings management.
Most earnings management studies in the literature can be classiﬁed as event studies:
how ﬁrms manage earnings in a predicted direction due to a speciﬁc motive in an event.
The interest there is in the directional shifts of accruals, with the research design naturally
centered on the mean properties. Popular models on the conditional means of accruals such