Earnings Quality and Short Sellers

Posted: 9 Jun 2003

See all articles by Scott A. Richardson

Scott A. Richardson

AQR Capital Management, LLC; London Business School


A key measure of earnings quality is the deviation of net income from operating cash flows. Sloan (1996) finds that firms with high accruals (or a large gap between net income and operating cash flow) experience a decline in earnings performance not anticipated by investors, resulting in predictable future returns. In this paper, I examine whether investors short sell securities with high accruals. Such a strategy is able to directly profit from the predictable lower future returns. Using a sample of U.S traded firms from 1990-1998, I do not find evidence that short sellers trade on the basis of information contained in accruals.

Keywords: accruals, earnings quality, returns short sellers

JEL Classification: G10, M41

Suggested Citation

Richardson, Scott Anthony, Earnings Quality and Short Sellers. Accounting Horizons, pp. 49-61, Supplement 2003. Available at SSRN: https://ssrn.com/abstract=410382

Scott Anthony Richardson (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

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

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