What Is Jones Model Estimation
Jones model estimation is a method used to separate a company's reported earnings into discretionary and non-discretionary components. It is widely applied in accounting research and financial analysis to assess earnings quality and potential earnings management.
How Jones Model Estimation Works
The model estimates expected accruals based on changes in revenue, property, plant, and equipment, and prior period accruals. By comparing actual accruals to these expected values, analysts can identify abnormal accruals that may signal aggressive reporting. The approach is often used in academic studies and forensic accounting reviews.
Applications and Limitations
Practitioners use Jones model estimation to evaluate earnings quality, screen for potential red flags, and support audit and compliance decisions. However, the model relies on assumptions about revenue and asset growth that may not fit every industry. For more detail on accrual-based models, see this overview from the SEC on accounting research.
