Earnings Quality and Future Capital Investment: Evidence from Discretionary Accruals
42 Pages Posted: 20 Mar 2008
Date Written: March 2008
This paper examines how one aspect of earnings quality - discretionary accruals - affects subsequent capital investment pattern and efficiency. We find that, conditional on investment opportunities, investment in fixed assets in period t is less sensitive to internal cash flows for firms with large positive discretionary accruals in period t-1. We also find that, at a given level of capital investment in fixed assets in period t, the return on assets in period t +1 is lower for firms with large positive discretionary accruals in period t-1. The overall evidence suggests that firms with large positive discretionary accruals misallocate resources, and thus, impose dead-weight efficiency loss.
Keywords: earnings quality, discretionary accruals, capital investment, investment efficiency
JEL Classification: G31, M41, M43
Suggested Citation: Suggested Citation