Information in Accruals About the Quality of Earnings

52 Pages Posted: 16 Aug 2001

See all articles by Scott A. Richardson

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Mark T. Soliman

University of Southern California - Marshall School of Business

A. Irem Tuna

London Business School

Date Written: July 2001

Abstract

We extend the analysis in Sloan (1996) to identify the source of information in accruals about earnings quality. Our results indicate that information in accruals about earnings quality is not limited to the current accruals analyzed by Sloan, but extends to non-current accruals. We also show that while information in accruals originates almost exclusively from asset accruals, liability accruals play a useful role in helping to isolate information in asset accruals about earnings quality. Finally, we show that information in accruals about earnings quality originates from both growth in the scale of operations and deterioration in the efficiency of asset usage. Overall, our results indicate that total accruals, defined as the difference between earnings and free cash flows, provide an intuitive, robust and parsimonious measure of earnings quality. Contrary to existing studies, our results also indicate that the information in accruals about earnings quality is not attributable to a single factor, such as 'discretionary' accruals or firm growth.

Keywords: Accruals; Growth; Efficiency; Abnormal returns

JEL Classification: M41, M43, G12

Suggested Citation

Richardson, Scott Anthony and Sloan, Richard G. and Soliman, Mark T. and Tuna, Ayse Irem, Information in Accruals About the Quality of Earnings (July 2001). Available at SSRN: https://ssrn.com/abstract=278308 or http://dx.doi.org/10.2139/ssrn.278308

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Richard G. Sloan (Contact Author)

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

Los Angeles, CA 90089-0441
United States

Mark T. Soliman

University of Southern California - Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Ayse Irem Tuna

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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