Accrual Reliability, Earnings Persistence and Stock Prices

65 Pages Posted: 28 Mar 2004  

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Richard G. Sloan

University of California, Berkeley - Accounting Group

Mark T. Soliman

University of Southern California - Marshall School of Business

A. Irem Tuna

London Business School

Abstract

This paper extends the work of Sloan (1996) by linking accrual reliability to earnings persistence. We construct a model showing that less reliable accruals lead to lower earnings persistence. We then develop a comprehensive balance sheet categorization of accruals and rate each category according to the reliability of the underlying accruals. Empirical tests generally confirm that less reliable categories of accruals lead to lower earnings persistence and that investors do not fully anticipate the lower earnings persistence, leading to significant security mispricing. We conclude that there are significant costs associated with the recognition of unreliable information in financial statements.

Keywords: Accruals, reliability, earnings persistence, capital markets, market efficiency

JEL Classification: G12, G14, M41, M43

Suggested Citation

Richardson, Scott A. and Sloan, Richard G. and Soliman, Mark T. and Tuna, A. Irem, Accrual Reliability, Earnings Persistence and Stock Prices. Journal of Accounting & Economics, Vol. 39, No. 3, September 2005. Available at SSRN: https://ssrn.com/abstract=521062

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

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

Richard G. Sloan (Contact Author)

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Mark T. Soliman

University of Southern California - Marshall School of Business ( email )

Los Angeles, CA 90089
United States

Ayse Irem Tuna

London Business School ( email )

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

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