Comparison between Linear and Non-Linear Models of Estimating Discretionary Accruals applying Type I Error Monte Carlo Simulation Method

Subject Areas :

Vahid Rohollahi ¹ , SeyedAbbas Hashemi ² , Maryam Sharifdoust ³ , Maryam Farhadi ⁴

1 - PhD Student, Department of Accounting, Mobarakeh Branch, Islamic Azad University, Isfahan, Iran
2 - Associate Professor of Accounting, University of Isfahan, Isfahan, Iran
3 - Assistant Professor, Department of Statistics and Mathematics, Khomeinishahr Branch, Islamic Azad University, Isfahan, Iran
4 - Assistant Professor, Department of Accounting, Mobarakeh Branch, Islamic Azad University, Isfahan

Received: 2022-12-15

Keywords: Accruals, Discretionary Accruals, Modified Jones Model, Monte Carlo Simulation, Spline Interpolation,

Abstract :

Standard discretionary accrual models such as modified Jones model assume a linear relationship between sales changes and accruals. As the non-linearity of sales changes are not considered in these models, they suffer from non-linear bias in discretionary accrual estimates. The aim of this study is comparing the estimated discretionary accruals using linear models and non-linear models. To test the hypothesis of the research, sample of 180 listed companies on Tehran Stock Exchange are selected during the years 2010 to 2020 and type I error Monte Carlo simulation is applied. For this purpose, estimated discretionary accruals are divided into ten deciles based on the sales growth variable then 250 random samples of 100 observations are taken with replacement from the estimated discretionary accruals, the type I error percentage are tested with the null hypothesis of zero discretionary accruals against the alternative hypotheses of positive and negative discretionary. The results obtained from type I error Monte Carlo simulation show that the linear discretionary accrual models have high type I error and high rejection rates for null hypothesis, whereas the nonlinear models have less type I error and less rejection rates for null hypothesis. These findings suggest that the non-linear estimation models of discretionary accruals, have a better specification than the Standard discretionary accrual models such as modified Jones model.