A Modified Dechow and Dichev Model

We propose a modified DD (Dechow and Dichev, 2002) model of accruals estimation errors by adding last-year, current, and one-year-ahead cash inflows as additional explanatory variables to DD model. This modification allows the mapping schedule of revenue related accruals to past, current and future cash inflows to be different from the mapping schedule of expense related accruals to past, current and future cash outflows. Compared with DD model, our modified DD model has a significantly higher adjusted RSQ in explaining variations of working capital accruals. It also generates estimated accrual errors that are more negatively auto-correlated, less persistent in predicting future earnings, and marginally more associated with the incidence of true estimation errors inferred from restatements. Following the same concept in our modification to DD model, we further propose two separate models for revenue and expense related accrual estimation errors. We find that residual accruals from our DD Revenue and Expense models demonstrate properties that are more consistent with the behaviors of estimation errors than the existing models.