A Reexamination of the Persistence of Accruals and Cash Flows
Journal of Accounting Research, Vol. 43, pp. 413-451, June 2005
39 Pages Posted: 8 May 2006
Date Written: 2004-10-29
We reexamine prior studies` conclusion that accruals are less persistent than cash, focusing on two aspects of persistence that are crucial to determining its properties. The first (time specificity) refers to the fact that persistence describes how shocks to income translate into next-period income. Traditional measures of accruals are, however, functions of current- non-current-period transactions. We show that the inclusion of non-current-period transactions leads to a downward (upward) bias on the persistence of accruals (cash flows). We develop alternative measures of accruals and cash flows that are not misaligned and show that the differential persistence of cash flows over accruals is more than 70% smaller using these measures. The second aspect of persistence is firm-specificity. Specifically, we evaluate persistence using firm-specific estimations and find that more than 85% of firms show no evidence that accruals are less persistent than cash flows.
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