The Value of Long-Term Accrual Management

47 Pages Posted: 3 Sep 2009 Last revised: 23 Apr 2011

See all articles by Tony S. Wirjanto

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Sati P. Bandyopadhyay

University of Waterloo

Alan Guoming Huang

University of Waterloo

Date Written: June 5, 2010

Abstract

Extant literature suggests that income smoothing can be measured either by the correlation between cash flows and accruals or by the volatility of accruals. We find that high levels of future returns associated with the correlation measure are completely offset by the negative future returns associated with accrual volatility over one-month to five-year horizons; that is, long-term accrual management leads to lower future firm values. This evidence holds for both discretionary and operating accruals, for firms that exhibit varying combinations of cash flowaccrual correlations and accrual volatilities, and after controlling for commonly used returninformative variables. Our analyses suggest that the net negative effect of income smoothing is attributable to information uncertainty due to accrual volatility.

Keywords: value, earnings smoothing, accrual volatility, future returns

JEL Classification: G12, M41

Suggested Citation

Wirjanto, Tony S. and Bandyopadhyay, Sati P. and Huang, Alan G., The Value of Long-Term Accrual Management (June 5, 2010). AAA 2010 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: https://ssrn.com/abstract=1466347 or http://dx.doi.org/10.2139/ssrn.1466347

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

Sati P. Bandyopadhyay

University of Waterloo ( email )

School of Accountancy
Waterloo, Ontario N2L 3G1
Canada
519-888-4567, ext. 2533 (Phone)
519-888-7562 (Fax)

Alan G. Huang (Contact Author)

University of Waterloo ( email )

School of Accounting and Finance
Waterloo, Ontario N2L 3G1
Canada
519-888 4567 ext. 36770 (Phone)

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