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Accrual Reversals, Earnings and Stock Returns

47 Pages Posted: 29 Sep 2009 Last revised: 11 Nov 2015

Eric J. Allen

University of Southern California - Leventhal School of Accounting

Chad R. Larson

University of Houston - Department of Accountancy & Taxation

Richard G. Sloan

University of California, Berkeley - Accounting Group; University of Southern California - Leventhal School of Accounting

Date Written: April 2, 2013

Abstract

We document pervasive evidence of reversals in firm-level working capital accruals over adjacent fiscal years. We demonstrate that the majority of these accrual reversals relate to ‘good’ accruals that: (i) correctly anticipate future benefits; (ii) lead to higher earnings persistence; and (iii) are not associated with security mispricing. We show that the lower persistence of the accrual component of earnings and associated mispricing documented in Sloan (1996) are driven by a combination of accruals related to firm growth and accrual estimation error.

Keywords: Accruals, Accrual Reversals, Earnings, Stock Returns, Inventory

JEL Classification: M41, G12

Suggested Citation

Allen, Eric J. and Larson, Chad R. and Sloan, Richard G., Accrual Reversals, Earnings and Stock Returns (April 2, 2013). Available at SSRN: https://ssrn.com/abstract=1480248 or http://dx.doi.org/10.2139/ssrn.1480248

Eric J. Allen

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Chad Russell Larson

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Richard G. Sloan (Contact Author)

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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