TY - JOUR
AU1 - Fairfield, Patricia
AU2 - Whisenant, Scott
AU3 - Yohn, Teri
AB - Prior research provides evidence that a higher proportion of accrued relative to cash earnings is associated with lower earnings performance in the subsequent fiscal year. The result has been widely interpreted as indicative of higher levels of operating accruals relative to cash flows foreshadowing a subsequent “earnings reversal,” and thus signaling earnings management. We note, however, that earnings performance in prior studies is typically defined as one-year-ahead operating income divided by one-year-ahead invested capital, or a measure of profitability. We find that accruals are more highly associated than cash flows with invested capital in the denominator of the profitability measure. In contrast, accruals and cash flows have no differential relation to one-year-ahead operating income. The evidence is not consistent with accruals having a reversal effect on earnings. This suggests that the lower persistence of accruals versus cash flows may not be due to earnings management but may rather be due to the effect of growth on future profitability.
TI - The Differential Persistence of Accruals and Cash Flows for Future Operating Income versus Future Profitability
JF - Review of Accounting Studies
DO - 10.1023/A:1024413412176
DA - 2004-10-02
UR - https://www.deepdyve.com/lp/springer-journals/the-differential-persistence-of-accruals-and-cash-flows-for-future-GKvL0CYL3g
SP - 221
EP - 243
VL - 8
IS - 3
DP - DeepDyve