Accrued Earnings and Growth: Implications for Future Profitability and Market Mispricing

Posted: 24 Sep 2002

See all articles by Patricia M. Fairfield

Patricia M. Fairfield

Georgetown University - Department of Accounting and Business Law

Scott Whisenant

University of Kansas

Teri Lombardi Yohn

Emory University Goizueta Business School

Abstract

Prior research reveals that the accrual component of profitability is less persistent than the cash flow component, and that investors fail to fully appreciate their differing implications for future profitability (Sloan 1996). However, accruals are a component of growth in net operating assets as well as a component of profitability. Just as we can disaggregate profitability into accruals and cash flows from operations, we can disaggregate growth in net operating assets into accruals and growth in long-term net operating assets. We find, after controlling for current profitability, that both components of growth in net operating assets - accruals and growth in long-term net operating assets - have equivalent negative associations with one-year-ahead return on assets. This result is consistent with conservative accounting and diminishing marginal returns on investments. We also find, after controlling for current profitability, that the market appears to equivalently overvalue accruals and growth in long-term net operating assets relative to their association with one-year-ahead ROA. Our evidence suggests that the accrual anomaly documented in Sloan (1996) is a special case of what could be viewed as a more general growth anomaly.

Keywords: accrued earnings, growth, earnings quality, financial statement analysis, market mispricing

JEL Classification: G14, G29, M41

Suggested Citation

Fairfield, Patricia M. and Whisenant, Scott and Yohn, Teri Lombardi, Accrued Earnings and Growth: Implications for Future Profitability and Market Mispricing. Available at SSRN: https://ssrn.com/abstract=322520

Patricia M. Fairfield

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-4583 (Phone)
202-687-4031 (Fax)

Scott Whisenant

University of Kansas ( email )

Capitol Federal Hall, #4101
1654 Naismith Dr.
Lawrence, KS 66045
United States
785-864-7577 (Phone)

HOME PAGE: http://https://business.ku.edu/scott-whisenant

Teri Lombardi Yohn (Contact Author)

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
3,276
PlumX Metrics