Explaining accruals quality over time: The role of operating volatility
52 Pages Posted: 6 Dec 2019 Last revised: 4 Jun 2021
Date Written: May 25, 2021
Prior research finds evidence suggesting a long-term trend of declining accruals quality in the U.S. Using the Dechow and Dichev (2002) accruals quality measure, we provide new evidence that this decline began to reverse around 2000, with accruals quality continuing to improve in more recent years. We find that this intertemporal pattern is significantly associated with the firm’s operating cash flow volatility. We corroborate these results in a battery of additional tests which indicate that the pattern of accruals quality cannot be explained by alternative theories regarding changes in the composition of public firms, regulation, or accounting standards. Overall, our evidence suggests that concerns about a decline in earnings and accruals quality are overstated.
Keywords: accruals quality, earnings quality, cash flow volatility
JEL Classification: D84, G14, M41
Suggested Citation: Suggested Citation