The Ebbing of Accrual Accounting

Abstract

This paper investigates the evolution of accruals ability to improve the information content of earnings over cash flows, as reflected in market prices. We documented a pronounced decline in the price association of earnings relative to cash flows. We find that, after year 2000, cash flows have informed prices at least as much as earnings. We explain the decline in earnings price association through the decrease of the timing role of accruals related to “the growth in the frequency and the magnitude of non-timing accruals” (Bushman et al. 2016). Our results imply that this evolution of accruals has severely limited the information content of earnings and, consequently, significantly weakened the pertinence of accrual accounting to prices.

Keywords: Expectation Formation Pertinence, Earnings, Cash Flows, Accrual Accounting, Non-linear Association, Non-parametric Regression

JEL Classification: G10, G30, M41