The Number of Estimates in Footnotes and Accruals

This study quantifies the number of estimates involved in firms’ accruals and examines whether it is informative about the relation between accruals and future earnings. We measure the number of estimates using the frequency of the use of the word estimate in the qualitative portions of a firm’s Notes to the Financial Statements (footnotes). Motivated by arguments regarding the impact of estimation errors in accruals, we hypothesize and find that the accruals of firms that have more estimates have a lower relation with future earnings (i.e., lower persistence) and a lower association with their past, current, and future cash flows. This paper was accepted by Suraj Srinivasan, accounting. Funding: This work was supported by Zijiang Endowment. H. Chen acknowledges the financial support from the National Natural Science Foundation of China [Grants 72150710550, 71790591, and 72121002]. J. V. Chen acknowledges the financial support from the University of Michigan, University of Illinois at Chicago, Paton Accounting Fellowship, and Harry Jones Endowment. F. Li acknowledges the financial support from SJTU SAIF Zijiang Discipline Development Fund, sponsored by the Zijiang Foundation. Supplemental Material: The internet appendix and data are available at https://doi.org/10.1287/mnsc.2022.4659 .