Review of Accounting Studies, 8, 245–250, 2003
# 2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Discussion of ‘‘The Differential Persistence of
Accruals and Cash Flows for Future Operating
Income versus Future Proﬁtability’’
ILIA D. DICHEV firstname.lastname@example.org
University of Michigan Business School
Abstract. Fairﬁeld et al. (2003a, this issue) suggests that the accrual effect in Sloan (1996) is at least partly
due to the fact that accruals signify an increase in (less-productive) net operating assets. Thus, the paper is
a useful and thought-provoking reminder that accruals have both earnings and balance sheet effects.
However, the impact of the empirical results is diminished by the lack of a convincing story that ties and
grounds these results to other knowledge in the area.
Sloan (1996) is an inﬂuential study, which documents a simple but important
relation: the accrual portion of earnings is less persistent than the cash portion of
earnings. In addition, Sloan ﬁnds that investors do not seem to fully appreciate
the implications of accruals for future earnings, so that ﬁrms with high current
accruals earn lower future stock returns. This study prompted a ﬂurry of
subsequent research which investigates the speciﬁc causes and explanations for this
phenomenon. For example, Xie (2001) ﬁnds that the lower persistence of accruals
is primarily due to the role of discretionary accruals, while Desai et al. (2002)
argue that the accrual effect for stock returns is a variation on the ‘‘value/glamor’’
Fairﬁeld et al. (2003a, this issue), hereafter FWY, is another follow-up on Sloan
(1996), which observes that the documented effects in accruals and cash ﬂows
concern variables scaled by some measure of investment (e.g., total assets). Thus, the
documented lower persistence of scaled accruals could be due to one of two effects.
First, it could be due to the lower persistence of unscaled accruals (a numerator
effect), which is the commonly accepted explanation. Alternatively, FWY suggests
that the lower persistence of scaled accruals could be due to the relation between
accruals and growth in the investment base (a denominator effect). As the author
points out, this alternative explanation seems promising because the concept of
accruals is closely related to the concept of growth in assets. In fact, the commonly
used balance sheet-based derivation of accruals reveals that the two concepts are at
least somewhat mechanically related.