Accrual Reversals, Earnings and Stock Returns
Eric J. Allen
University of Southern California - Leventhal School of Accounting
Chad R. Larson
University of Houston - Department of Accountancy & Taxation
Richard G. Sloan
University of California at Berkeley - Haas School of Business
April 2, 2013
We document pervasive evidence of reversals in firm-level working capital accruals over adjacent fiscal years. We demonstrate that the majority of these accrual reversals relate to ‘good’ accruals that: (i) correctly anticipate future benefits; (ii) lead to higher earnings persistence; and (iii) are not associated with security mispricing. We show that the lower persistence of the accrual component of earnings and associated mispricing documented in Sloan (1996) are driven by a combination of accruals related to firm growth and accrual estimation error.
Number of Pages in PDF File: 47
Keywords: Accruals, Accrual Reversals, Earnings, Stock Returns, Inventory
JEL Classification: M41, G12
Date posted: September 29, 2009 ; Last revised: April 3, 2013
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