A Re-Examination of the Costs (and Benefits) to Equity Investors from Including Accruals in Financial Reporting

45 Pages Posted: 20 Sep 2008 Last revised: 2 Jul 2009

See all articles by Bradley E. Lail

Bradley E. Lail

Baylor University

Robert Lipe

Price College of Business

Han Yi

Korea University

Date Written: June 26, 2009


Based on assertions that unreliable accruals can be "extremely costly" to investors (Richardson et al. 2005), we re-examine how the accrual component of earnings is associated with current-period and future-period returns to better understand if accruals can be beneficial in investment decisions. We find that accruals exhibit significantly positive associations with current-period returns, insignificant negative associations with future-period returns, and significantly positive associations with two-year returns cumulated over current and future periods. The results using current-period and two-year returns indicate that accruals contain beneficial information about corporate performance. The insignificant associations with future returns contradict prior conclusions that accruals impose future trading losses on investors. When the results from all three returns periods are considered together, the evidence fails to support prior conclusions that the costs and benefits to investors are explained by accrual reliability.

Keywords: Accruals, Cash Flows, Accrual Anomaly, Accounting Standard Setting

JEL Classification: M41

Suggested Citation

Lail, Bradley E. and Lipe, Robert C. and Yi, Han, A Re-Examination of the Costs (and Benefits) to Equity Investors from Including Accruals in Financial Reporting (June 26, 2009). AAA 2009 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: https://ssrn.com/abstract=1270848 or http://dx.doi.org/10.2139/ssrn.1270848

Bradley E. Lail

Baylor University ( email )

One Bear Place #98002
Waco, TX 76798
United States

Robert C. Lipe (Contact Author)

Price College of Business ( email )

307 W Brooks
307 West Brooks, Room 200
Norman, OK 73019
United States
405-325-2401 (Phone)
405-325-7348 (Fax)

Han Yi

Korea University ( email )

Main Business Building 402
Korea University Business School
Seoul, 136-701
+82-2-3290-2629 (Phone)

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics