The Usefulness of Long-Term Accruals
Wayne R. Guay
University of Pennsylvania - Accounting Department
University of New South Wales - Australian School of Business
October 28, 2011
Abacus, No. 37, pp. 110–131, 2001
Though empirical evidence strongly supports the role of short-term operating accruals in improving operating cash flows as a measure of performance, there is little support or consensus with respect to the effect of long-term accruals. We provide evidence that long-term accruals do reduce timing and matching problems in cash flows. In return-earnings regressions, long-term accruals are found to improve earnings as a measure of firm performance, although not to the same extent as short-term accruals. Further, our analysis highlights differences in economic and statistical properties between short-term and long-term accruals and demonstrates how these differences impede the ability of long-term accruals to improve earnings as a performance measure in a return-earnings context. The incremental explanatory power of long-term accruals is shown to be hampered by the lack of present-value considerations in the existing accounting model, timeliness problems, and measurement error in the indirect method of computing cash flows and accruals.
Keywords: Accrual accounting, accruals, cash flows, corporate performance, long-term, short-term
JEL Classification: M40, M41Accepted Paper Series
Date posted: October 28, 2011
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