Journal of Accounting Review  2026/07
JAR Vol. 83   135-166
DOI:DOI: 10.6552/JOAR.202607_(83).0004

The Validity of ROA-Matched Discretionary Accruals as an Earnings Management Measure in the Taiwan Market

Abstract

Discretionary accruals are often used to measure financial reporting quality. To be a valid proxy for earnings management detection, its large magnitude should not be systematically related to other growth characteristics or economic fundamentals. This study finds that the large values of discretionary accruals estimated from the Jones-type regression model, with and without ROA-matching adjustment, are skewed towards extreme earnings-to-price ratios and past sales growth in the Taiwan market. We consider two alternative approaches: one is based on matching by the earnings-to-price ratio, and the other is based on factor regression adjustment. The simulation-based tests demonstrate that the two proposed methods effectively address the over-rejection issues under the null hypothesis of no earnings management and retain sufficient power to detect earnings management under the alternative hypothesis.