Accrual Reliability, Earnings Persistence and Stock Prices

65 Pages Posted: 28 Mar 2004

See all articles by Scott A. Richardson

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

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 Anthony and Sloan, Richard G. and Soliman, Mark T. and Tuna, Ayse 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 Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Mark T. Soliman

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

2250 Alcazar Street
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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