The Implications of Accounting Distortions and Growth for Accruals and Profitability
- 1 March 2004
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
Following Sloan (1996), numerous studies show that the accrual component of earnings is less persistent than the cash flow component of earnings. Disagreement exists, however, as to the explanation for this result. Xie (2001) attributes the result to managerial discretion. Fairfield et al. (2003a) argue that it is a special case of a more general growth anomaly that is attributable to the widespread use of conservative accounting methods and/or diminishing marginal returns to new investment. Finally, Dechow and Dichev (2002) and Richardson et al. (2004) argue that it is attributable to transitory accrual estimation error. In this paper, we provide theory and evidence to discriminate between these alternative explanations. Our analysis suggests that transitory accrual estimation error provides the most consistent explanation for the lower persistence of the accrual component of earnings. Further, our results suggest the accrual estimation error is at least partially attributable to managerial discretion.Keywords
This publication has 18 references indexed in Scilit:
- Understanding earnings quality: A review of the proxies, their determinants and their consequencesJournal of Accounting and Economics, 2010
- Accrual reliability, earnings persistence and stock pricesJournal of Accounting and Economics, 2005
- How Are Earnings Managed? Examples from AuditorsAccounting Horizons, 2003
- The Differential Persistence of Accruals and Cash Flows for Future Operating Income versus Future Return on AssetsSSRN Electronic Journal, 2002
- Do Analysts and Auditors Use Information in Accruals?Journal of Accounting Research, 2001
- Uniformly least powerful tests of market efficiencyJournal of Financial Economics, 2000
- Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*Contemporary Accounting Research, 1996
- Earnings Management During Import Relief InvestigationsJournal of Accounting Research, 1991
- The effect of bonus schemes on accounting decisionsJournal of Accounting and Economics, 1985
- Risk, Return, and Equilibrium: Empirical TestsJournal of Political Economy, 1973