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The information content of Discretionary

accruals’
discretionary accruals during informativeness
during crises
systemic crises
Nicola Moscariello, Pietro Fera and Ettore Cinque 455
Department of Economics, University of Campania ‘Luigi Vanvitelli’, Capua, Italy
Received 24 April 2018
Revised 5 November 2018
Abstract 21 March 2019
8 July 2019
Purpose – By analyzing the relationship between discretionary accruals and information asymmetry 4 November 2019
throughout the latest global financial crisis, this paper deepens our understanding of the effect of managerial 11 December 2019
discretion on the informativeness of earnings in the case of a negative exogenous shock in business Accepted 20 December 2019
fundamentals.
Design/methodology/approach – This paper examines the relationship between discretionary accruals and
the bid–ask spread within the Italian Stock Exchange over the period of 2007–2012. The authors focus on one
country in order to avoid systematic cross-country performance variation in discretionary accruals models, and
they use the bid–ask spread as a proxy for information asymmetry.
Findings – This paper shows the role played by discretionary accruals in unblocking private information in
the case of a negative exogenous shock in business fundamentals and finds a significant negative relationship
between discretionary accruals and the bid–ask spread during the global financial crisis, although only limited
to firms with strong corporate governance.
Research limitations/implications – Since the paper focuses on one country, the findings might not be
necessarily generalizable. Moreover, the relatively small sample size could be another limitation.
Practical implications – This paper offers useful evidence to identify settings in which discretionary
accruals increase the informativeness of earnings. Further, it suggests controlling for macroeconomic variables
to mitigate the risk of an erroneous interpretation of discretionary accruals models.
Originality/value – This paper extends knowledge and collects new evidence on the information content of
discretionary accruals by investigating the relationship between discretionary accruals and information
asymmetry during a systemic crisis.
Keywords Discretionary accruals, Earnings quality, Information asymmetry, Bid-ask spread, Global
financial crisis, Corporate governance
Paper type Research paper

1. Introduction
Earnings are the key performance metric for capital allocation decisions (Graham et al., 2005).
Earnings quality therefore affects the level of information asymmetry between insiders and
outsiders (Francis et al., 2005; Bhattacharaya et al., 2012). Given that the realized cash flows
subcomponent of earnings is the most reliable part of accounting numbers (Dechow et al.,
1998), the usefulness and the quality of earnings depend on the quality of the accrual
subcomponent that, in turn, depends on the innate portion of accruals as well as on its
discretionary components. The former is related to the firm’s business model and operating
environment (Dechow and Dichev, 2002; Francis et al., 2005). The latter are instead a function
of accounting choices that are likely to reflect both performance measurement and
opportunism (Guay et al., 1996; Subramanyam, 1996).
The ambivalent nature of the discretionary components of earnings makes it difficult to
predict how discretionary accruals might influence the informativeness of earnings (Arya
et al., 2003). On one hand, the long survivorship of managerial discretion over accruals
Journal of Applied Accounting
suggests that the net effect of the discretionary components is probably to enhance earnings Research
as a performance indicator, representing a vehicle to unblock communication to outsiders Vol. 21 No. 3, 2020
pp. 455-476
(Guay et al., 1996; Healy, 1996). In this sense, several papers stress the strategic role of © Emerald Publishing Limited
0967-5426
discretionary accruals in conveying private information and in lowering the level of DOI 10.1108/JAAR-04-2018-0054
JAAR information asymmetry (Subramanyam, 1996; Demski, 1998; Bowen et al., 2008). On the other
21,3 hand, when incentives for an opportunistic discretion are strong, the opportunistic
subcomponent is likely to prevail over the performance one, with a negative impact on the
quality of earnings and, in turn, on the level of information asymmetry (Fan, 2007; Cohen and
Zarowin, 2010; Bhattacharaya et al., 2013).
Despite the heterogeneity of their results, a common feature of the aforementioned
papers is the assumption that the innate and the discretionary components of earnings
456 quality are orthogonal to each other. In other terms, the nature of the managerial discretion
over earnings (performance vs opportunistic) is not assumed to be correlated with any of
the innate components of earnings quality (Francis et al., 2006). However, Athanasakou and
Olsson (2016) seem to contradict this theory as they provide evidence that the economic
consequences of managerial accounting discretion vary systematically with firm’s
fundamentals. In particular, the authors find that, although the managerial accounting
discretion is generally viewed as enhancing the information asymmetry, its negative effects
on the informativeness of earnings is attenuated with higher volatility in firm
fundamentals.
Therefore, the assumption of an absence of a relationship between the innate and the
discretionary components of earnings quality might not hold in case of an abrupt change of
the innate factors caused by a negative exogenous shock in the market. The sudden and
shared worsening of the innate components of the earnings quality might, in fact, represent
an incentive for managers to use their discretion over accruals to signal future performance
and to restore – at least in part – the level of the earnings informativeness. For this reason, our
paper extends the research on this topic by analyzing the relationship between discretionary
accruals and information asymmetry in the case of a negative exogenous shock in the market
and predicts a negative relationship between the former and the latter.
To test our hypotheses, we examine the relationship between discretionary accruals and
the bid–ask spread within the Italian Stock Exchange during the latest global financial crisis.
We focus on one country to avoid systematic cross-country performance variation in
discretionary accruals models (Peek et al., 2013), and we use the bid–ask spread as a proxy for
information asymmetry (Bartov and Bodnar, 1996; Bar-Yosef; Prencipe, 2013).
Our results show the importance of the performance subcomponent of discretionary
accruals during the global financial crisis. More precisely, although limited to firms with
strong corporate governance, during the global financial crisis, the magnitude of
discretionary accruals is negatively correlated with the bid–ask spread. We interpret these
findings as evidence of the role that the environmental conditions characterizing our sampled
firms (a systemic financial crisis) play in enhancing the informativeness of discretionary
accruals, in addition to the strength of their corporate governance mechanisms. Our findings
are robust to a battery of robustness tests.
The remainder of the paper proceeds as follows. The next section outlines the background
on the relation between discretionary accruals and information asymmetry and develops the
research hypotheses. Section 3 briefly presents the Italian setting. Sections 4 describes the
research methodology, while Section 5 discusses the empirical evidence with the related
additional robustness tests. Section 6 concludes.

2. Background and hypotheses development

2.1 Literature review
Prior literature highlights a negative relationship between higher-quality disclosure and
information asymmetry (Diamond and Verrecchia, 1991; Leuz; Verrecchia, 2000; Brown and
Hillegeist, 2007).
 Since earnings are the most important component of a firm’s overall disclosure quality Discretionary
(Graham et al., 2005), an increasing number of papers have focused on the relationship accruals’
between the accrual-based earnings quality and information asymmetry, examining the
effects of both the innate and the discretionary components of accruals quality on the
informativeness
information asymmetry among market participants (Dechow et al., 2010; Bhattacharaya during crises
et al., 2012).
The quality of the innate portion of accruals is affected by variables such as firm size, sales
and cash flow volatility, the length of operating cycles and the frequency of negative earnings 457
realizations and is found to be inversely correlated to information asymmetry (Francis et al.,
2005). The discretionary components of accruals are instead a function of accounting choices
and are influenced by two subcomponents: the performance subcomponent, which reflects
management’s attempts to enhance the ability of earnings to reflect firms’ performance, and
the opportunistic subcomponent, which reduces the accruals quality. The ambivalent nature
of these subcomponents makes it difficult to predict how they might influence the
informativeness of earnings (Arya et al., 2003).
Guay et al. (1996) and Healy (1996) highlight that the long survivorship of managerial
discretion over accruals is probably associated with its role to enhance earnings as a
performance indicator, since managers are assumed to exercise discretion over earnings to
convey private information to outside investors and mitigate information asymmetry. In this
sense, Subramanyam (1996) finds a positive correlation between stock returns and
discretionary accruals. Louis and Robinson (2005) collect strong evidence suggesting that
managers use discretionary accruals in conjunction with stock splits to convey their private
information. Tucker and Zarowin (2006) provide evidence that income smoothing improves
the informativeness of past and current earnings about future earnings and cash flows.
Bowen et al. (2008) find a positive association between accounting discretion, future cash
flows and return on assets, and Koerniadi and Tourani-Rad (2011) find evidence consistent
with managers using accruals in order to communicate private information about the firm’s
future profitability. Furthermore, Linck et al. (2013) point out the strategic use of
discretionary accruals by financially constrained firms to signal positive prospects, while
Neifar and Utz (2019) highlight that the managerial discretion over earnings is
nonopportunistic.
However, when incentives for an opportunistic managerial discretion are strong, the
opportunistic subcomponent is likely to prevail over the performance one, with a negative
impact on the information asymmetry. Fan (2007) and Cohen and Zarowin (2010) show an
upward earnings management for initial public offerings or seasoned equity offerings.
Bhattacharaya et al. (2013) find that both extreme positive and negative discretionary
accruals increase information asymmetry. A positive association between discretionary
accruals and information asymmetry is also shown by Bar-Yosef and Prencipe (2013).
A common feature of the aforementioned literature is the assumption that the innate and
the discretionary components of earnings quality are orthogonal to each other. Being shaped
by firms’ long-run strategic decisions, the innate components of earnings quality are slow to
change relative to factors that influence management’s period-by-period reporting decisions
and therefore are not deemed to be correlated with the nature of managerial discretion over
earnings (Francis et al., 2006).
However, Athanasakou and Olsson (2016) seem to contradict the orthogonal relationship
between the innate and the discretionary components of earnings quality and provide some
early evidence on a direct relationship between firms’ fundamentals volatility and the
information content of discretionary accruals. In particular, the authors find that, although
managerial accounting discretion is generally viewed as enhancing information asymmetry,
its negative effects on earnings informativeness is attenuated with higher volatility in firm
fundamentals (Athanasakou and Olsson, 2016:4). Consequently, this paper assumes a
JAAR relationship between the quality of the innate components of earnings and the information
21,3 content of discretionary accruals and examines how the latter changes in the case of a sudden
deterioration of the former caused by a systemic crisis.

2.2 Hypotheses development

This paper hypothesizes that the absence of a relationship between the innate and the
458 discretionary components of earnings quality might not hold in the case of an abrupt change
in the fundamentals of innate accruals quality caused by a negative exogenous shock in the
market. The sudden and shared worsening of the innate components of the earnings quality
might, in fact, represent an incentive for managers to use their discretion over accruals to
signal future performance and, consequently, to restore – at least in part – the level of
earnings informativeness.
Therefore, this paper assumes that the higher market uncertainty and volatility during the
global financial crisis are likely to negatively impact the economic fundamentals and, in turn,
worsen the innate component of earnings quality. This scenario introduces a common
incentive for managers to convey private information about firms’ future cash flows through
discretionary accruals and, therefore, mitigates the expected intrafirm and across-firm
differences between the performance and the opportunistic subcomponents. Consequently,
this paper tests the following first hypothesis:
H1. During the crisis years, discretionary accruals are negatively correlated with the
bid–ask spread.
The negative relationship between discretionary accruals and information asymmetry
during a period of negative exogenous shock in the market might be further enhanced for
firms with robust governance mechanisms. In fact, prior literature on corporate governance
highlights that good governance systems effectively constrain the opportunistic
subcomponent of discretionary accruals and increase the quality of earnings (Lin et al.,
2016). Moreover, the positive association between the strength of corporate governance and
the quality of accounting outcomes is even stronger during a period of systemic crisis
(Aldamen and Duncan, 2016). Consequently, this paper also tests the following second
hypothesis:
H2. During the crisis years, the quality of firms’ corporate governance enhances the
negative relationship between discretionary accruals and the bid–ask spread.

3. The Italian setting

To avoid potential inference problems in across-sample comparisons, this study focuses on
one country – that is, Italy (Peek et al., 2013).
Italy is a typical European code-law country with a relatively small equity market
(seventh in Europe and in the World’s Top 20), but with a national economy that is the third
largest in the Eurozone, the eighth largest in the world by nominal GDP and the eighth largest
in the world in exports (IMF, 2017).
The Italian Stock Exchange is not so different from others (Bar-Yosef and Prencipe,
2013:299). Specifically, it has been an order-driven market since 1991 and operates under a
segmented market structure like many other European exchanges. Moreover, the Italian
Stock Exchange has been part of the London Stock Exchange Group since 2007.
Regarding the accounting system, Italy is part of the global community that from 2005 has
opted for the mandatory adoption of the international accounting standards (IAS/IFRS).
Further, more than 90% of Italian listed companies are audited by big audit firms whose
independence is preserved through the adoption of a mandatory rotation rule and legal Discretionary
restrictions on the provisions of nonauditing services to listed client firms (Cameran accruals’
et al., 2016).
As for the corporate governance framework, the ownership structure of Italian listed firms
informativeness
is on average highly concentrated and is traditionally coupled with a condition of weak legal during crises
protection of minority shareholders and a widespread use of control-enhancing mechanisms
that allow the controlling shareholders to separate their voting rights from their economic
risk (Co.N.So.B., 2019). Therefore, the Italian market has been depicted as a setting with weak 459
managers, strong blockholders and unprotected minority shareholders (Melis, 2000, p. 351).
However, in the last 15 years, major reforms, mirroring those taking place all over Europe,
have been undertaken in Italy to strengthen investor protection and improve the quality of
firm corporate governance (Enriques, 2009; Campa and Donnelly, 2014).
Overall, Italy shares most of its basic economics, financial and accounting features with
the majority of European countries (as well as some countries outside Europe), and this
mitigates concerns about the generalizability of our findings (Bar-Yosef and Prencipe, 2013;
Morais et al., 2018). Moreover, since Italy has been one of the worst hit by the global financial
crisis among the major advanced countries (IMF, 2014), the Italian listed companies have
likely suffered a worsening in their economic fundamentals, with a deterioration in the
accounting quality and, consequently, a stronger scope for managerial discretion over
accruals (Iatridis and Dimitras, 2013).

4. Research methodology
4.1 Sample and data selection
The sample consists of nonfinancial companies listed on the Italian Stock Exchange during
the reference period, from 2007 to 2012. We exclude all firms that refer to the GICS 40
(financials) and to GICS 60 (real estate) because of their peculiar financial reporting rules.
Then, we drop from the sample firms with a lack of historical financial market, accounting
and corporate governance data and firms involved in business combinations. At the same
time, to rule out any possible survivorship bias (Bartov et al., 2000; Ecker et al., 2006), we do
not exclude firms that were delisted or went bankrupt during the reference period.
As shown in Table 1, the sample is composed of 105 firms, with 623 firm-year
observations. The relatively small sample size is due to the limited size of the Italian stock
market and to our sampling criteria. Nevertheless, the sample covers 73% of the Italian stock
market capitalization in the reference period.
Data were collected from different sources: financial market and accounting data were
collected from Thomson Reuters Eikon and Datastream, while corporate governance data
were hand-picked from CONSOB (the Italian supervisory authority for financial markets)
online databases and from companies’ annual reports.
We analyze the 2007–2012 period because it allows us to include a specific period that
reflects a context of macroeconomic downturn. More precisely, we start from 2007 to analyze
the differential effect that the burst of a systemic market turmoil might have on the

Population of nonfinancial listed firms 228

Financial market and accounting data not available
63
Corporate governance data not available
53
Companies involved in extraordinary operations
2
Companies with unconventional reporting periods
5 Table 1.
Basic sample 105 Sample selection
Note(s): This table highlights the main steps of the sampling process process
JAAR relationship between discretionary accruals and information asymmetry. We do not consider
21,3 years prior to 2007 because of the IAS/IFRS adoption that became mandatory in Europe in
2005 (EU regulation 1606/2002/EC). In this way, we avoid problems related to the
comparability of accounting numbers that might have been jeopardized from the adoption of
different reporting systems. Further, the choice of 2009 as the starting year of the crisis stems
from the analysis of several official international reports that claimed that the global financial
crisis hit a peak in Europe, and particularly in Italy, during 2009 (IMF, 2014). Moreover, these
460 international reports lead us to consider all years from 2009 to 2012 as the crisis period, since
they are characterized by high volatility and uncertainty. Our data are consistent with this
evidence (please refer to Figure 1 and Figure 2) and follow the previous literature focused on a
reference period that encompasses the global financial crisis (Filip and Raffournier, 2014;
Cimini, 2015).

4.2 Variables definition

In this section, we define proxies for information asymmetry, discretionary accruals and
other variables, in addition to describing the appropriate model specification.
4.2.1 Dependent variable: proxy for information asymmetry. Theory suggests that the bid–
ask spread is affected by three key elements: order processing costs, inventory holding costs
and information asymmetry costs (Glosten and Harris, 1988). Several studies have focused on
the last component, and empirical findings suggest that a higher market players’ perception
of better-informed traders is associated with a larger bid–ask spread. Therefore, the bid–ask
spread is widely used as a proxy for information asymmetry (Bartov and Bodnar, 1996).
For each firm-year observation, we define the bid–ask spread around the earnings
announcement averaging the daily bid–ask spread for six months. To overcome the
nonlinearity matter and obtain a more relevant measure for the comparison across firms, we
employ the percentage bid–ask spread (Roll, 1984; Callahan et al., 1997):
ðAskPrice
BidPriceÞit
Bid
Askit ¼ (1)
½AskPrice þ BidPrice=2it

where i and t represent, respectively, the firm and the year.

%
3

2
EUROPE
1
ITALY
0

-1

-2

-3

-4

-5

-6
Figure 1. 2008 2009 2010 2011 2012 2013 2014 2015 2016
European and Italian
GDP growth (%) Source(s): World Bank
Retrieved: 12/10/2018 – 8:20 a.m. – from https://data.worldbank.org/indicator
 0.045 Discretionary
0.040 accruals’
0.035 informativeness
0.030 during crises
0.025
0.020
461
0.015
0.010
0.005
0.000
2007 2008 2009 2010 2011 2012

Figure 2.
ROA
Trend of the Italian
firms’ ROA 2007–2012
Source(s): Data elaboration from the Authors’ database

4.2.2 Independent variable: proxy for discretionary accruals. Prior literature suggests
several methods to determine discretionary accruals. However, given the limited number of
observations in our sample, we employ the DeFond and Park (2001) model in order to estimate
the discretionary working capital accruals (DA) as a proxy for managerial discretion over
accounting numbers (Wysocki, 2004; Bar-Yosef and Prencipe, 2013):

  
WCAt−1
DAt ¼ WCAt
*St (2)
St−1

where t identifies the reference year, DA represents the discretionary working capital
accruals, WCA indicates the noncash working capital accruals [1] and S stands for the
annual sales.
We scale DA by end-of-the-year total assets, and we use the absolute value of DA because
our purpose is to estimate the magnitude of discretionary accruals, irrespective of its intent to
increase or decrease income.
4.2.3 Moderating variables.
(1) Financial crisis dummy
This paper relies on the assumption that the deterioration in business fundamentals reduces
the innate component of accruals quality and represents an incentive for managers to use
their discretion over accruals to signal future performance. For this reason, we include a
dummy variable (Crisis) to capture an abrupt change in the innate component of accruals
caused by a negative exogenous shock in the market. This variable also allows us to control
for macroeconomic uncertainty and volatility, which are deemed to influence information
asymmetry. Specifically, the variable ðCrisisÞ takes the value of 1 for all post-2008 firm-year
observations and 0 otherwise.
(2) Proxy for corporate governance
We set up a governance score (GovScore) relying on ten items that affect the quality of
corporate governance. Consistent with the prior literature, we assume that seven of them are
positively related with the quality of corporate governance: the percentage of independent
directors within the board and within the control committee; the presence of minority
JAAR directors within the board and within the control committee; the appointment of an internal
21,3 control committee; the number of the control committee’s meetings; and the presence of
institutional investors with significant interests in the share capital (Rosenstein and Wyatt,
1990; Borokhovich et al., 1996; Cotter et al., 1997; Dahya et al., 2008). Moreover, we assume a
negative relationship between the quality of corporate governance and the remaining three
items: board size, control committee size and the CEO duality (Dechow et al., 1996; Yermack,
1996; Peasnell et al., 2005).
462 For each firm-year observation, each element is converted into a dummy variable, which
takes the value of 1 if it positively affects the quality of corporate governance (for values
above or below the median, according to their expected effects on corporate governance) and
0 otherwise (see Table 2).
Summing the total number of points awarded to each firm-year observation for all items,
we obtain the GovScore that can range from 0 (bad corporate governance) to 10 (good
corporate governance):
X
10
GovScoreit ¼ ðRatingj Þit (3)
j¼1

where j is the single corporate governance item, i represents the firm and t indicates the year.
After determining the GovScore for each firm-year observation, we turned it into a dummy
variable (CGScore), which takes the value 1 if the total firm-year score is above the median and
0 otherwise. This step allows us to single out firms with strong corporate governance from
those with weak corporate governance.

CG features Description Rating

BoDSize Number of the board of directors’ constituents 0 if above the

median,
1 otherwise
BoDIndependents Percentage of independent directors 1 if above the
median,
0 otherwise
BoDMinority Director elected from the minority shareholders’ slate 1 if elected,
0 otherwise
BoDDuality The CEO is also the chairman of the board of directors 1 if not detected,
0 otherwise
ControlCommittee Internal monitoring authority 1 if constituted,
0 otherwise
CCSize Number of the control committee’s constituents 0 if above the
median,
1 otherwise
CCIndependents Percentage of independent directors among the control 1 if above the
committee’s members median,
0 otherwise
CCMinority Member of the control committee elected from minority 1 if elected,
shareholders’ slate 0 otherwise
CCMeetings Number of control committee’s meetings during the reporting 1 if above the
period median,
0 otherwise
Table 2. InstitutionalInvestors Accredited market operator with significant interests in the 1 if present,
Components of share capital 0 otherwise
corporate Note(s): This table presents the subcomponents of the corporate governance score and their assumed impact
governance score on the quality of corporate governance, as defined in section 4.2.3-b)
 4.2.4 Control variables. To test our hypotheses, we control for other features that affect Discretionary
information asymmetry, identifying two groups of variables that can be clustered as firm- accruals’
accounting and firm-market attributes.
Following the prior literature, among the firm-accounting attributes we include total
informativeness
annual sales (Sales) as a proxy for firm size, return on assets (ROA), which is defined as the during crises
ratio between operating income and total assets, and financial leverage (Leverage), which is
computed as net debt over total assets. We expect a positive impact of Sales and ROA on the
bid–ask spread, while we do not make any prediction on the relationship between Leverage 463
and the dependent variable since prior literature finds mixed results on their association
(Amihud and Mendelson, 2012).
Firm-market attributes are also able to affect the perceived level of information
asymmetry both positively and negatively. Consistent with the prior empirical literature, we
expect a positive impact of trading volume, price close and free floating on the bid–ask spread
(Lee et al., 1993; Leuz and Verrecchia, 2000). TradingVolume is the annual average value of daily
traded shares; PriceClose represents the annual average of the daily last closing price of traded
shares; and FreeFloating indicates the percentage of shares promptly available on the market.
Finally, we control for Volatility, defined as the annual average of daily changes in traded
securities’ value, expecting a negative impact on the bid–ask spread (Frino and Jones, 2005).

4.3 Model specification

To test the first hypothesis, we set up the following log-log regression model:
LnBid −Askit ¼ β0 þ β1 LnDAit þ β2 Crisisit þ β3 ðCrisis*LnDA Þit
þ β4 CGScoreit þ β5 LnSalesit þ β6 LnROAit
þ β7 LnLeverage it þ β8 LnTrading Volumeit þ β9 LnPriceCloseit (4)
X
þ β10 LnFreeFloatingit þ β11 LnVolatility it þ ðYearsEffects Þit þ εit

where i represents the firm, t indicates the reference year and εit stands for the regression
error. The dependent variable (LnBid−Ask) is our proxy for information asymmetry as defined
in Section 4.2.1. Our main independent variable LnDA is the proxy for discretionary accruals
as determined in Section 4.2.2. We also have the moderator (Crisis), which allows us to set up
the interaction variable (Crisis*LnDA) to detect the impact of discretionary accruals on
information asymmetry in the case of systemic market turmoil. Therefore, β3 is used to test
whether discretionary accruals are negatively correlated with the bid–ask spread during the
crisis years, according to our first hypothesis.
To test the second hypothesis, we have modified Equation (4) including the whole set of
interactions between the quality of corporate governance (CGScore) and both the proxy for
discretionary accruals and the Crisis dummy. Accordingly, the regression equation is:
LnBid −Askit ¼ β0 þ β1 LnDAit þ β2 Crisisit þ β3 ðCrisis*LnDA Þit
þ β4 CGScoreit þ β5 ðCGScore*LnDA Þit þ β6 ðCrisis*CGScore Þit
þ β7 ðCrisis*CGScore*LnDA Þit þ β8 LnSalesit þ β9 LnROAit (5)
þ β10 LnLeverage it þ β11 LnTrading Volumeit þ β12 LnPriceCloseit
X
þ β13 LnFreeFloatingit þ β14 LnVolatility it þ ðYearsEffects Þit þ εit

where the coefficient β7 is used to test whether the quality of firms’ corporate governance
enhances the negative relationship between discretionary accruals and the bid–ask spread
during the crisis years, according to our second hypothesis.
All variables included in both Equation (4) and Equation (5) (except dummy ones) identify
the natural logarithm function of their definition as reported in Section 4.2. The
implementation of the log-log specification stems from several reasons. First, most of the
JAAR variables suffer from positive skewness, and the log-log model is particularly useful for
21,3 facing this issue (Martınez-Zarzoso, 2011). Second, the log-log specification also alleviates
potential heteroskedasticity, and it is appropriate to account for potential nonlinearity
matters in the relationship between financial market variables and accounting numbers
(Kothari et al., 2005; Banker et al., 2014). Finally, we rely on previous studies on the bid–ask
spread that use log-log regressions (Fehle, 2004; Agrawal et al., 2004).
464
5. Results and discussion
5.1 Descriptive statistics
Descriptive statistics are provided in Table 3. The average percentage bid–ask spread is
about 2.4% (with a median value of 1.5%) and the mean value of DA is about 0.05 (its median
stands at about 0.03). The average corporate governance score and its median are very close
to each other (5.68 and 6, respectively). Finally, as for the multivariate analysis, descriptive
statistics suggest the use of the natural logarithm function of all variables to reduce the
positive skewness of their raw values. Moreover, data are winsorized at the upper and lowest
1% of the distribution to avoid the distortive effects of outliers.
Table 4 provides evidence on the hypothesis that the global financial crisis is likely to
worsen the economic fundamentals and, in turn, the innate component of earnings quality. In
accordance with our assumption, during the crisis period we detect higher volatility of sales,
cash flows and earnings, an increasing proportion of negative earnings and a greater
magnitude of accruals.

5.2 Univariate analysis and preliminary tests

Table 5 provides the pairwise correlations matrix and highlights that information
asymmetry (LnBid−Ask) is significantly and positively correlated with abnormal accruals
(LnDA) and macroeconomic uncertainty (Crisis), while it is significantly and inversely
correlated with the quality of corporate governance (CGScore). It is also interesting to note the
negative correlation between CGScore and LnDA and the positive association between CGScore
and Crisis.
Table 6 shows the descriptive statistics comparison between the precrisis and the crisis
period for Bid − Ask and DA. Specifically, Panel A shows that the average bid–ask spread
does not significantly change when comparing the precrisis and crisis periods. Moreover, as
shown in Panel B, it is interesting to note the significantly lower level of information
asymmetry characterizing firms with good corporate governance (Good − Gov) compared
with weak corporate governance firms (Bad − Gov). When we consider the time comparison
of discretionary accruals between the precrisis and crisis periods, Panel C shows that there
are no significant differences in the average level of discretionary accruals. However,
substantial changes arise when we analyze firms with different corporate governance
quality. In fact, Panel D shows that, during the crisis period, firms with strong corporate
governance (Good − Gov) have lower discretionary accruals compared to firms with weak
corporate governance (Bad − Gov).

5.3 Main analysis

Prior to the main analysis, we perform the Hausman test and we control for
heteroskedasticity matters (through a Breusch–Pagan and Cook–Weisberg test). Results
from those tests suggest the use of a fixed-effects panel data regression with robust standard
errors.
To test the first hypothesis, we regress Equation (4) as reported in Column 1 of Table 7.
Specifically, after controlling for a set of variables that affect the bid–ask spread, Equation (4)
 Obs Min Max Mean Median StdDev Variance Skewness Kurtosis

Bid–Ask 623 0.001 0.120 0.024 0.015 0.025 0.001 1.831 6.439
DA 623 0.001 0.343 0.049 0.028 0.062 0.004 2.551 10.489
GovScore 623 2 10 5.682 6 1.626 2.645 0.271 2.797
CGScore 623 0 1 0.292 0 0.455 0.207
0.720 1.518
Crisis 623 0 1 0.669 1 0.471 0.222 0.914 1.836
Sales 623 5.06Eþ06 8.27Eþ10 3.22Eþ09 3.55Eþ08 1.08Eþ10 1.17Eþ20 6.09Eþ00 4.20Eþ01
ROA 623 0.572 1.203 1.020 1.036 0.093 0.009
1.695 8.962
Leverage 623 0.572 0.774 0.314 0.305 0.168 0.028 0.362 2.984
TradingVolume 623 6.94Eþ03 2.67Eþ08 9.61Eþ06 2.73Eþ05 3.48Eþ07 1.21Eþ15 5.90Eþ00 4.04Eþ01
PriceClose 623 0.084 54.090 5.884 2.984 8.402 70.586 3.272 16.324
FreeFloating 623 0.078 0.822 0.357 0.349 0.159 0.025 0.763 3.565
Volatility 623 1.015 1.070 1.037 1.035 0.012 0.001 0.589 3.044
Note(s): This table reports the main descriptive statistics for the modeled variables as defined in Section 4.2. Note that GovScore is the basic governance score used to
obtain CGScore, as defined in section 4.2.3-b), and it is not included in the regression models
465
during crises
informativeness
accruals’
Discretionary

Table 3.
Descriptive statistics
JAAR allows to assess how discretionary accruals affect the level of information asymmetry during
21,3 a period of systemic crisis.
The analysis of β3 from Equation (4) shows that the variable (Crisis*LnDA) is negatively and
significantly related to LnBid−Ask (t 5
1.75, pv 5 0.083). However, to assess the full effect of
discretionary accruals on the bid–ask spread during the crisis period, we perform the
parametric test of Wald on (β1 þ β3). The sum of these coefficients is negative (
0.014) but not
statistically significant (F 5 0.61, Prob > F 5 0.437).
466 Therefore, our findings are not consistent with the first hypothesis. In fact, the magnitude
of discretionary accruals during the crisis does not lower per se the level of information
asymmetry.
To test the second hypothesis, we regress Equation (5) as reported in Column 1 of
Table 8.
Equation (5) shows a negative and significant correlation between Crisis*CGScore*LnDA
and LnBid−Ask (t 5
1.89, pv 5 0.061). Again, to assess the full effect of discretionary
accruals on the bid–ask spread during the crisis period for firms with strong corporate
governance, we perform the parametric test of Wald on (β1 þ β3 þ β7). The sum of these
coefficients is negative (
0.098) and statistically significant (F 5 2.97, Prob > F 5 0.087),
confirming the second hypothesis according to which the discretionary accruals reported
during the crisis period by firms with strong corporate governance reduce the information
asymmetry since their performance subcomponent fully dominates the opportunistic one
in response to an exogenous negative shock in the innate components of the earnings
quality.

5.4 Robustness checks

To examine the robustness of the main results, we run several additional tests. First, we
define different time windows for the bid–ask spread as a proxy for information asymmetry.
Specifically, we define the bid–ask spread at 1 month, 3 months and 7 months around
earnings announcement, and we employ the log specification of these new measures in both
Equation (4) and Equation (5) as described in Section 4.3. Findings from the new models are
robust and do not change significantly.
Second, we consider an alternative measure of discretionary accruals, and building on
Francis et al. (2005), we use the Dechow and Dichev (2002) model as modified by McNichols
(2002):
ΔWCAit ¼ β0 þ β1 CFOiðt−1Þ þ β2 CFOit þ β3 CFOiðtþ1Þ þ β4 ΔSalesit þ β5 PPEit þ εit (6)

where (all variables are scaled by lagged total assets) ΔWCA represents the change in
working capital accruals (1), CFO is the cash from operations, ΔSales stands for changes in
sales, PPE corresponds to property, plant and equipment, while i and t represent each firm-
year observation.

Fundamentals of innate accruals quality Precrisis period Crisis period

Sales volatility (StDev) 0.080 0.089

Cash flow volatility (StDev) 0.040 0.051
Earnings volatility (StDev) 0.030 0.050
Frequency of negative earnings (EBITDA) 11.65% 15.63%
Table 4. Frequency of negative earnings (NIBE) 26.70% 34.62%
Trend of innate Magnitude of working capital accruals 0.065 0.080
accruals quality Note(s): This table highlights the trend of the innate components of earnings quality before and after the burst
fundamentals of the global financial crisis. Variables are given in mean
 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

(1) LnBid-Ask 1.000*

(2) LnDA 0.115* 1.000*
(3) CGScore
0.218*
0.109* 1.000*
(4) Crisis 0.077*
0.005* 0.099* 1.000*
(5) LnSales
0.571*
0.222* 0.282*
0.020* 1.000*
(6) LnROA
0.325*
0.188* 0.112*
0.079* 0.456* 1.000*
(7) LnLeverage
0.032*
0.043* 0.076* 0.010* 0.113* 0.019* 1.000*
(8) LnTrading Volume
0.719*
0.152* 0.359*
0.064* 0.761* 0.314* 0.096* 1.000*
(9) LnPriceClose
0.322*
0.135* 0.143*
0.121* 0.277* 0.396*
0.047* 0.337* 1.000*
(10) LnFreeFloating
0.275* 0.063* 0.141*
0.018* 0.161*
0.043* 0.138* 0.387*
0.082* 1.000*
(11) LnVolatility 0.194* 0.132*
0.134*
0.291*
0.260*
0.373* 0.136*
0.097*
0.294* 0.095* 1.000*
Note(s): This table summarizes the results from the pairwise correlation among variables as defined in Section 4.2. *Significance at the 0.10
467
during crises
informativeness
accruals’
Discretionary

matrix
Table 5.
Univariate correlations
JAAR Obs Mean Median
21,3
Panel A: Bid–ask spread t-test during the pre- and crisis periods
Precrisis 206 0.025 0.011
Crisis 417 0.024 0.017
Differences 0.001
0.006
Ha: Difference ! 5 0 Ha: Difference <0
468 Pr (jTj > jtj) 5 0.596 Prob > jzj 5 0.095
Panel B: Bid–ask spread t-test good governance and bad governance during the crisis
Good-Gov 135 0.019 0.017
Bad-Gov 282 0.026 0.021
Differences
0.007
0.004
Ha: Difference < 0 Ha: Difference < 0
Pr (T < t) 5 0.003 Prob > jzj 5 0.000
Panel C: DA t-test during the pre- and crisis periods
Precrisis 206 0.048 0.027
Crisis 417 0.049 0.029
Differences
0.001
0.002
Ha: Difference ! 5 0 Ha: Difference ! 5 0
Pr (jTj > jtj) 5 0.806 Prob > jzj 5 0.822
Panel D: DA t-test good governance and bad governance during the crisis
Good-Gov 135 0.042 0.021
Bad-Gov 282 0.053 0.030
Differences
0.011
0.009
Ha: Difference < 0 Ha: Difference < 0
Pr (T < t) 5 0.046 Prob > jzj 5 0.006
Table 6. Note(s): Panel A shows differences in bid–ask spread during the pre- and crisis periods. Panel B shows
Two-tiles t-tests differences in bid–ask spread for firms with strong and weak corporate governance. Panel C shows differences
comparison on Bid– in discretionary accruals during the pre- and crisis periods. Panel D shows differences in discretionary accruals
Ask spread and DA for firms with strong and weak corporate governance during the crisis period

Equation (6) is performed using a larger sample including all Italian firms with available
accounting data in Thomson Reuters Eikon and Datastream, regardless of the
contemporaneous availability of corporate governance and financial market data (as
required in our main sampling process), and then performed cross-sectionally for each
industry-year from 2007 to 2012 (where industries are classified according to the Global
Industry Classification Standard). The regression coefficients obtained from Equation (6) are
then used to estimate the expected values for each firm-year observation of our sample.
Finally, the discretionary component of working capital accruals is determined as the
difference between the observed values in our sample and the expected values obtained from
Equation (6). Once the discretionary accruals are estimated, we employ their log specification
in both Equation (4) and Equation (5) as described in Section 4.3.
As reported in Table 9, findings from this model are consistent with the results discussed
in Section 5.3. Specifically, as reported in Column 2, the negative and significant relationship
between Crisis*CGScore*LnDA and LnBid−Ask (t 5
1.82, pv 5 0.072) and the significant
parametric statistical test of Wald on (β1 þ β3 þ β7) suggest that information asymmetry is
negatively related to the magnitude of discretionary accruals when firms have a strong
corporate governance and operate in a turbulent and uncertain context.
Finally, since the identification of the crisis period might not be a common ground, we use
both the DeFond and Park (2001) and the McNichols (2002) models focusing on 2009 as the
“event year,” as it is assumed to be the worst year of the global financial crisis (Figure 1).
 6 Months 1 Month 3 Months 7 Months
Discretionary
Dependent variable B-A spread B-A spread B-A spread B-A spread accruals’
LnBid-Ask β t-stat β t-stat β t-stat β t-stat informativeness
Intercept
2.869
2.47**
3.115
2.12**
3.164
2.57**
2.538
2.30** during crises
LnDA 0.030 1.36 0.051 1.78* 0.032 1.29 0.029 1.36
Crisis 1.458 11.68*** 1.168 8.28*** 1.406 10.59*** 1.301 10.71***
Crisis*LnDA
0.044
1.75*
0.070
2.23**
0.036
1.27
0.041
1.72* 469
CGScore
0.099
1.94
0.137
2.21**
0.094
1.72*
0.072
1.49
LnSales
0.037
0.65
0.015
0.22
0.021
0.36
0.044
0.81
LnROA
0.553
2.13**
0.551
1.48
0.468
1.65
0.452
1.60
LnLeverage
0.026
0.54
0.019
0.29
0.034
0.65
0.053
1.07
LnTrading Volume
0.123
3.92***
0.125
3.06***
0.125
3.51***
0.145
4.78***
LnPrice Close
0.174
4.00***
0.204
3.13***
0.183
3.58***
0.142
3.44***
LnFree Floating
0.160
2.06**
0.121
1.22
0.139
1.70*
0.153
2.13**
LnVolatility 4.711 1.68* 5.738 1.57 6.127 2.07** 6.025 2.37**
Year effects Included Included Included Included
2
R within 0.835 0.775 0.803 0.823
R2 between 0.805 0.749 0.784 0.848
R2 overall 0.806 0.752 0.777 0.824
F-value 119.34 106.41 106.76 113.59
Prob. > F 0.000 0.000 0.000 0.000
No. of observations 623 623 623 623
No. of groups 105 105 105 105
Full effect of DA on the bid–ask spread during the crisis period
Table 7.
Test (β1 þ β3) 5 0 F 5 0.61 F 5 1.07 F 5 0.030 F 5 0.570
Regression analysis
Prob > F 5 0.437 Prob > F 5 0.304 Prob > F 5 0.855 Prob > F 5 0.453
with different time
Note(s): This table shows the estimation results relative to Equation (4), employing different time windows for windows for the Bid–
the bid–ask spread as defined in Section 4.2.1 and in Section 5.4, and the subsequent parametric test of Wald. Ask spread in
Significance at: 0.01*** – 0.05** – 0.1* Equation (4)

As for the DeFond and Park (2001) model, we follow the same approach described in Section
4.2.2. However, Equation (2) is performed cross-sectionally with t identifying the 2009.
As for the McNichols (2002) model, we determine discretionary working capital accruals
for 2009 making the difference between the observed CFO2009−1, CFO2009, CFO2009þ1,
ΔSales2009 and PPE2009 values in our sample and the expected values obtained from
Equation (6).
Once estimated the 2009 discretionary accruals following DeFond and Park (2001) and
McNichols (2002), we set up the following model in order to assess their effect on level
information asymmetry:
LnBid−Aski ¼ β0 þ β1 LnDAi þ β2 CGScorei
þ β3 ðCGScore*LnDA Þi þ β4 LnSalesi þ β5 LnROAi
þ β6 LnLeverage i þ β7 LnTradingVolumei (7)
þ β8 LnPriceClosei þ β9 LnFreeFloatingi
X
þ β10 LnVolatility i þ ðFixedEffects Þi þ εi

Findings from these two additional models confirm the results discussed in Section 5.3.
Specifically, as reported in Column 2 and Column 4 of Table 10, the negative correlations
between CGScore*LnAWCA and LnBid−Ask and the significant parametric statistical tests of Wald
on (β1 þ β3) confirm that information asymmetry is negatively related to the magnitude of
discretionary accruals when firms operate in an uncertain context, mainly when they have
strong corporate governance mechanisms.
 21,3

470
JAAR

Table 8.

Equation (5)
Ask spread in
with different time
Regression analysis

windows for the Bid–

6 Months 1 Month 3 Months 7 Months
Dependent variable B-A spread B-A spread B-A spread B-A spread
LnBid-Ask β t-stat β t-stat β t-stat β t-stat

Intercept
2.482
2.10**
2.670
1.76*
2.737
2.19**
2.129
1.90*

LnDA 0.017 0.78 0.025 0.79 0.019 0.76 0.015 0.75
Crisis 1.546 12.68*** 1.274 8.42*** 1.495 11.03*** 1.373 11.38***
Crisis*LnDA
0.007
0.27
0.028
0.79 0.003 0.09
0.009
0.35
CGScore
0.030
0.12 0.147 0.54
0.051
0.20
0.002
0.01
CGScore*LnDA 0.048 0.87 0.109 1.75* 0.044 0.78 0.050 0.95
Crisis*CGScore
0.257
1.01
0.376
1.18
0.252
0.92
0.211
0.87
Crisis*CGScore*LnDA
0.108
1.89*
0.144
1.98**
0.110
1.80*
0.097
1.82*
LnSales
0.056
0.97
0.038
0.54
0.042
0.72
0.064
1.17
LnROA
0.540
2.12**
0.547
1.49
0.453
1.64
0.443
1.60
LnLeverage
0.012
0.26
0.001
0.00
0.019
0.38
0.038
0.80
LnTradingVolume
0.126
4.09***
0.129
3.22***
0.129
3.71***
0.148
4.93***
LnPriceClose
0.174
4.29***
0.201
3.22***
0.185
3.86***
0.143
3.65***
LnFreeFloating
0.180
2.27**
0.142
1.43
0.161
1.93*
0.173
2.35**
LnVolatility 5.068 1.84* 6.007 1.66 6.531 2.26** 6.364 2.53**
Year effects Included Included Included Included
R2 within 0.836 0.779 0.806 0.826
R2 between 0.821 0.783 0.805 0.859
R2 overall 0.820 0.775 0.795 0.837
F-value 112.89 99.50 95.59 105.58
Prob. > F 0.000 0.000 0.000 0.000
No. of observations 623 623 623 623
No. of groups 105 105 105 105
Full effect of DA on the Bid–Ask spread during the crisis period for firms with strong corporate governance
Test (β1 þ β3 þ β7) 5 0 F 5 2.97 F 5 4.33 F 5 2.13 F 5 2.86
Prob > F 5 0.087 Prob > F 5 0.039 Prob > F 5 0.047 Prob > F 5 0.093
Note(s): This table shows the estimation results relative to Equation (5), employing different time windows for the Bid–Ask spread as defined in Section 4.2.1 and in
Section 5.4, and the subsequent parametric test of Wald. Significance at: 0.01*** – 0.05** – 0.1*
Dependent variable Equation (4) Equation (5)
Discretionary
LnBid-Ask β t-stat β t-stat accruals’
informativeness
Intercept
2.997
2.55**
2.597
2.20**
LnDA 0.032 1.41 0.019 0.87 during crises
Crisis 1.441 11.19*** 1.527 12.26***
Crisis*LnDA
0.046
1.83*
0.010
0.37
CGScore
0.097
1.87*
0.045
0.18 471
CGScore*LnDA 0.046 0.81
Crisis*CGScore
0.239
0.91
Crisis*CGScore*LnDA
0.105
1.82*
LnSales
0.030
0.52
0.049
0.86
LnROA
0.525
2.02**
0.513
2.01**
LnLeverage
0.030
0.62
0.015
0.32
LnTradingVolume
0.121
3.84***
0.124
4.02***
LnPriceClose
0.188
3.66***
0.188
3.95***
LnFreeFloating
0.153
1.92*
0.174
2.13**
LnVolatility 4.335 1.48 4.721 1.64
Year effects Included Included
R2 within 0.834 0.837
R2 between 0.777 0.799
2
R overall 0.795 0.812
F-value 119.43 110.17
Prob. > F 0.000 0.000
No. of observations 623 623
No. of groups 105 105
Full effect of DA on the Bid–Ask spread during the crisis
Test (β1 þ β3) 5 0 Test (β1 þ β3 þ β7) 5 0
F 5 0.680 F 5 2.75
Table 9.
Prob > F 5 0.410 Prob > F 5 0.090 Regression analysis
Note(s): This table shows the estimation results relative to Equation (4) and Equation (5), employing a from Equation (4) and
different proxy for discretionary accruals as defined in Section 5.4, and the subsequent parametric test of Wald. Equation (5) after
Significance at: 0.01*** – 0.05** – 0.1* McNichols (2002)

6. Concluding remarks and limitations

Numerous studies have stressed the direct relationship between earnings quality and
financial market efficiency. However, the quality of accounting numbers is a complex
phenomenon since it mainly depends on the quality of the accrual component of earnings.
Specifically, previous studies highlight that the accrual-based earnings quality depends
on the innate portion of accruals as well as on its discretionary components. The former is
related to the firm’s economic fundamentals, while the latter are functions of accounting
choices that are likely to reflect both performance measurement and opportunism.
Prior literature has shown that the net impact of the discretionary components is
probably to enhance earnings as a performance indicator. However, the opportunistic
subcomponent is likely to prevail over the performance one when incentives for an
opportunistic managerial exercise of discretion are stronger, with a negative impact on
earnings (accruals) quality.
A common feature of the aforementioned literature on accruals quality is that they assume
that the innate and the discretionary components of earnings quality are orthogonal to each
other. However, the assumption of an orthogonal relationship might not hold in the case of an
abrupt change of the innate factors caused by a negative exogenous shock in the market.
Indeed, the sudden and shared worsening of the innate components of the earnings quality,
which follows the deterioration of the business fundamentals, might represent an incentive
for managers to use their discretion over accruals to signal future performance and,
JAAR LnDA based on DeFond and Park (2001) LnDA based on McNichols (2002)
21,3 Dependent
variabl Check for Hp 1 Check for Hp 2 Check for Hp 1 Check for Hp 2
LnBid–Ask β t-stat β t-stat β t-stat β t-stat

Intercept
1.461
2.22**
1.355
2.15**
1.388
2.07**
1.197
1.86*

LnDA
0.063
2.39**
0.040
1.27
0.028
0.96 0.001 0.02
472 CGScore 0.249 3.29***
0.016
0.08 0.260 3.23***
0.198
0.84
CGScore
0.070
1.39
0.119
2.16**
*LnDA
LnSales
0.032
0.91
0.033
0.96
0.034
0.92
0.033
0.90
LnROA
0.546
1.54
0.497
1.37
0.545
1.41
0.570
1.51
LnLeverage 0.026 0.89 0.026 0.91 0.041 1.23 0.042 1.24
LnTradingVolume
0.267
12.62***
0.268
12.21***
0.262
11.85***
0.298
12.13***
LnPriceClose
0.041
1.35
0.042
1.40
0.040
1.27
0.041
1.34
LnFreeFloating
0.175
2.28**
0.180
2.35**
0.198
2.53**
0.196
2.58**
LnVolatility 15.370 2.36** 15.136 2.39** 13.834 2.07** 12.884 2.01**
Industry Included Included Included Included
effects
R2 0.885 0.887 0.880 0.886
Root MSE 0.327 0.325 0.334 0.327
F-value 52.31 51.29 47.63 48.56
Prob. > F 0.000 0.000 0.000 0.000
No. of 105 105 105 105
observations
Full effect of DA on the Bid–Ask spread during the event year (2009)
Test F 5 6.40 F 5 6.19
(β1 þ β3) 5 0 Prob > F 5 0.013 Prob > F 5 0.014
Table 10. Note(s): This table shows the estimation results relative to Equation (7), employing a different proxy for
Regression analysis discretionary accruals as defined in Section 5.4, and the subsequent parametric test of Wald. Significance at:
from Equation (7) 0.01*** – 0.05** – 0.1*

consequently, to restore – at least in part – the level of the earnings informativeness.

Therefore, this paper examines the impact of discretionary accruals on information
asymmetry during the global financial crisis and predicts a negative relationship between the
former and the latter.
Our results show the importance of the performance subcomponent of discretionary
accruals during the global financial crisis. In fact, with the onset of the global financial crisis,
the magnitude of discretionary accruals is negatively correlated with the bid–ask spread but
lowers the level of information asymmetry only when firms have strong corporate
governance mechanisms.
The contribution of this study is twofold. First, this paper answers a call for additional
research on discretionary accruals that addresses the environmental conditions surrounding
the economic consequences of managerial discretion on accruals (Barth, 2018). However,
while previous papers mainly focus on settings where management is incentivized to
manipulate earnings for opportunistic reasons (Healy, 1985; Jones, 1991; Sweeney, 1994; De
Angelo et al., 1994; Fan, 2007; Cohen and Zarowin, 2010), we contribute to the literature by
examining accruals when – during the global financial crisis – the performance
subcomponent of earnings quality is likely to dominate the opportunistic one. Related
papers have already found evidence showing an increase in listed companies’ earnings
quality (i.e. lower discretionary accruals) after the burst of a global financial crisis (Ming Chia
et al., 2007; Filip and Raffournier, 2014; Cimini, 2015; Kumar et al., 2019), but they focus on the
magnitude of discretionary accruals without investigating the impact of managerial
discretion over accruals on earnings informativeness. Second, since there is very limited prior Discretionary
evidence on the relationship between discretionary accruals and the bid–ask spread (as a accruals’
proxy of information asymmetry), this paper deepens the relationship between these
variables to examine how the former affects the latter during the global financial crisis.
informativeness
Our findings offer new insights into the information content of discretionary accruals and during crises
also suggest scholars to control for macroeconomic variables to increase the robustness of
discretionary accrual models and mitigate the risk of an erroneous interpretation of their
economic consequences in the case of negative exogenous shocks in the market. However, we 473
recognize that our results come with some potential caveats. Since we investigate the Italian
equity market, our findings might not be necessarily generalizable. Moreover, another
limitation of this study could be the relatively small sample size. These limitations surely
demand further analysis to deepen knowledge of a topic only partially explored.

Note
1. WCA is defined as ½ðcurrent assets–cash–shortterm investmentsÞ–ðcurrent liabilities–shortterm debtÞ.

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Corresponding author
Nicola Moscariello can be contacted at: nicola.moscariello@unicampania.it

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