Accrual Reversals, Earnings and Stock Returns
47 Pages Posted: 29 Sep 2009 Last revised: 11 Nov 2015
Date Written: April 2, 2013
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: Suggested Citation