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Earnings Quality and Future Capital Investment: Evidence From Discretionary Accruals*

42 Pages Posted: 11 Sep 2008  

Vicki Wei Tang

Georgetown University - Robert Emmett McDonough School of Business

Kevin K. Li

University of California, Riverside (UCR) - UCR School of Business Administration (SoBA)

Date Written: March 7, 2008

Abstract

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 mis-allocate resources, and thus, impose dead-weight efficiency loss.

Keywords: earnings quality, discretionary accruals, capital investment, investment

JEL Classification: G31, M41, M43

Suggested Citation

Tang, Vicki Wei and Li, Kevin K., Earnings Quality and Future Capital Investment: Evidence From Discretionary Accruals* (March 7, 2008). Available at SSRN: https://ssrn.com/abstract=1265320 or http://dx.doi.org/10.2139/ssrn.1265320

Vicki Wei Tang (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Kevin K. Li

University of California, Riverside (UCR) - UCR School of Business Administration (SoBA) ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States

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