Accrual Reversals and Cash Conversion
52 Pages Posted: 14 Sep 2014 Last revised: 2 Aug 2019
Date Written: February 1, 2017
We estimate the firm-level rate at which working capital accruals convert into future cash flows. These conversion rates determine the expected cash value of a dollar of working capital accruals. For firms whose accrual innovations reverse within one year, we find that, on average, a one dollar innovation to accruals translates into 95 cents of cash flow in the subsequent fiscal year. We find that the relation between working capital accruals and annual returns increases with the rate at which accrual innovations convert to cash flows. Moreover, when accrual innovations convert more quickly and completely to cash flows, firms are less likely to receive an Accounting and Auditing Enforcement Release (AAER) from the SEC.
Keywords: Accruals, earnings, cash flows, AAERs
JEL Classification: M41, M42
Suggested Citation: Suggested Citation