NDAit = [1/Ait-1] + + [PPEit/Ait-1] (4) β0 β1 [ΔREVit/Ait-1] β2 DAit = TAit NDAit (5) – Where: NDAit = non-discretionary accruals in year for firm t i; DAit = discretionary accruals in year for firm t i; Modified Jones Model The original Jones model has provided a relevant understanding regarding the detection and the measurement of the use of earnings management, many researchers using it in other studies about the use of earnings management. However, over time, it became subject to criticism. Consequently, other researchers have performed efforts to upgrade the original model and make it more effective and accurate. To the original Jones model two types of adjustments have been performed: data adjustment and variable adjustment. The first type, i.e. data adjustment, addresses the data to be used in the model for estimating accruals. The most significant data adjustment was performed by DeFond and Jiambalvo (1994), who, to improve the original model that used time-series data, introduced the usage of cross-sectional data. The variable adjustment type of modification addresses the variables used in the model. The modified Jones models attempt to improve the original model by adding extra variables, or by substituting the original variables with items that have the potential to be more relevant. Dechow et Al. (1995) introduced the modified Jones model, by adjusting the change in revenues with the change in the account receivables. The purpose of this modification was to eliminate the tendency of the original model to erroneously measure the discretionary accruals when discretion was applied by managers over revenues. NDAt = a1 (1/At-1) + - + a3 PPEt (6) a2 (∆REVt ∆RECt) Where: = change in revenues, i.e. revenues in year less revenues in year scaled by t t-1, ∆REVt total assets at t-1; = change in net receivables, i.e. net receivables in year less net receivables in t ∆RECt year scaled by total assets at t-1, t-1;
NDAit = β0 [1/Ait-1] + β1 [ΔREVit/Ait-1] + β2 [PPEit/Ait-1] (4) DAit = TAit – NDAit (5) Where: NDAit = non-discretionary accruals in year t for firm i; DAit = discretionary accruals in year t for firm i; Modified Jones Model The original Jones model has provided a relevant understanding regarding the detection and the measurement of the use of earnings management, many researchers using it in other studies about the use of earnings management. However, over time, it became subject to criticism. Consequently, other researchers have performed efforts to upgrade the original model and make it more effective and accurate. To the original Jones model two types of adjustments have been performed: data adjustment and variable adjustment. The first type, i.e. data adjustment, addresses the data to be used in the model for estimating accruals. The most significant data adjustment was performed by DeFond and Jiambalvo (1994), who, to improve the original model that used time-series data, introduced the usage of cross-sectional data. The variable adjustment type of modification addresses the variables used in the model. The modified Jones models attempt to improve the original model by adding extra variables, or by substituting the original variables with items that have the potential to be more relevant. Dechow et Al. (1995) introduced the modified Jones model, by adjusting the change in revenues with the change in the account receivables. The purpose of this modification was to eliminate the tendency of the original model to erroneously measure the discretionary accruals when discretion was applied by managers over revenues. NDAt = a1 (1/At-1) + a2 (∆REVt - ∆RECt) + a3 PPEt (6) Where: ∆REVt = change in revenues, i.e. revenues in year t less revenues in year t-1, scaled by total assets at t-1; ∆RECt = change in net receivables, i.e. net receivables in year t less net receivables in year t-1, scaled by total assets at t-1;