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Accrual Reliability, Earnings Persistence and Stock Prices


Scott A. Richardson


London Business School; AQR Capital Management, LLC

Richard G. Sloan


University of California at Berkeley - Haas School of Business

Mark T. Soliman


University of Southern California - Marshall School of Business

A. Irem Tuna


London Business School


Journal of Accounting & Economics, Vol. 39, No. 3, September 2005

Abstract:     
This paper extends the work of Sloan (1996) by linking accrual reliability to earnings persistence. We construct a model showing that less reliable accruals lead to lower earnings persistence. We then develop a comprehensive balance sheet categorization of accruals and rate each category according to the reliability of the underlying accruals. Empirical tests generally confirm that less reliable categories of accruals lead to lower earnings persistence and that investors do not fully anticipate the lower earnings persistence, leading to significant security mispricing. We conclude that there are significant costs associated with the recognition of unreliable information in financial statements.

Number of Pages in PDF File: 65

Keywords: Accruals, reliability, earnings persistence, capital markets, market efficiency

JEL Classification: G12, G14, M41, M43

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Date posted: March 28, 2004  

Suggested Citation

Richardson, Scott A. and Sloan, Richard G. and Soliman, Mark T. and Tuna, A. Irem, Accrual Reliability, Earnings Persistence and Stock Prices. Journal of Accounting & Economics, Vol. 39, No. 3, September 2005. Available at SSRN: http://ssrn.com/abstract=521062

Contact Information

Scott Anthony Richardson
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
AQR Capital Management, LLC ( email )
Greenwich, CT
United States
Richard G. Sloan (Contact Author)
University of California at Berkeley - Haas School of Business ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
Mark T. Soliman
University of Southern California - Marshall School of Business ( email )
Los Angeles, CA 90089
United States
Ayse Irem Tuna
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
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