The Ebbing of Accrual Accounting

57 Pages Posted: 21 Nov 2017 Last revised: 24 Mar 2019

See all articles by Catalin Starica

Catalin Starica

University of Neuchatel - Faculty of Economics and Business; Economics; Economics

Pierluigi Giosi

University of Neuchatel - Faculté des sciences économiques

Date Written: March 21, 2019

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

Suggested Citation

Starica, Catalin and Giosi, Pierluigi, The Ebbing of Accrual Accounting (March 21, 2019). Available at SSRN: https://ssrn.com/abstract=3072287 or http://dx.doi.org/10.2139/ssrn.3072287

Catalin Starica (Contact Author)

University of Neuchatel - Faculty of Economics and Business ( email )

A.-L. Breguet 2
CH-2000 Neuchatel
Switzerland

Economics ( email )

Box 605
SE 405 30 Goeteborg
Sweden

HOME PAGE: http://www.math.chalmers.se\~starica

Economics ( email )

Box 640
Vasagatan 1 E-building floor 5 & 6
Göteborg, 40530
Sweden

HOME PAGE: http://www.math.chalmers.se\~starica

Pierluigi Giosi

University of Neuchatel - Faculté des sciences économiques ( email )

A.-L. Breguet 2
CH-2000 Neuchatel
Switzerland

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