Accrual Reversals and Cash Conversion

52 Pages Posted: 14 Sep 2014 Last revised: 13 Feb 2017

See all articles by Matthew J. Bloomfield

Matthew J. Bloomfield

The Wharton School of the University of Pennsylvania

Joseph J. Gerakos

Tuck School of Business at Dartmouth College; Dartmouth College - Tuck School of Business

Andrei Kovrijnykh

Arizona State University (ASU)

Date Written: February 1, 2017

Abstract

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

Bloomfield, Matthew J. and Gerakos, Joseph J. and Kovrijnykh, Andrei, Accrual Reversals and Cash Conversion (February 1, 2017). Chicago Booth Research Paper No. 14-29. Available at SSRN: https://ssrn.com/abstract=2495610 or http://dx.doi.org/10.2139/ssrn.2495610

Matthew J. Bloomfield

The Wharton School of the University of Pennsylvania ( email )

1325 Steinberg-Dietrich Hall
3620 Locust Walk
Philadelphia, PA PA 19103-1724
United States
6073513042 (Phone)
6073513042 (Fax)

Joseph J. Gerakos (Contact Author)

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Andrei Kovrijnykh

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States
480-965-6216 (Phone)

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