A fundamental property of accrual accounting is to smooth temporary timing fluctuations in operating cash flows, indicating an inherent negative correlation between accruals and cash flows. We show that the overall correlation between accruals and cash flows has dramatically declined in magnitude over the past half century and has largely disappeared in more recent years. The adjusted R 2 from ...

This study examines the role of pre-IPO discretionary accruals in the valuation and first day initial returns of IPOs. We find that IPO offer price is unaffected whereas market closing price is positively associated with the levels of pre-IPO discretionary accruals for issuers with aggressively reported earnings. We also find that this relative over-valuation of managed earnings by the markets ...

Reliability and efficacy of accruals and cash flows which are among the most important factors affecting dividend deviation have always been in question and subject to anomalies. The presence of these anomalies in accruals and cash flows and its effect on future returns and the consequences that they can have in country’s investments are the main motives to choose this issue for the current stu...

This study links the trend in two earnings quality metrics: 1) the standard deviation of residuals from the Dechow and Dichev (2002) model, and 2) squared residuals from the Jones (1991) model to firm age (defined using data about firm incorporation/founding dates). The results reveal the significant increasing trends in both measures during the 1962-2006 period are related to the dramatic decr...

W document considerable return comovement associated with accruals after controlling for other common factors. An accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.16, higher than that of the market factor or the SMB and HML factors of Fama and French. According to rational frictionless asset pricing models, the ability of accruals to predict returns should come from the loadings...

Prior research has documented a ‘‘kink’’ in the earnings distribution: too few firms report small losses, too many firms report small profits. We investigate whether boosting of discretionary accruals to report a small profit is a reasonable explanation for this ‘‘kink.’’ Overall, we are unable to confirm that boosting of discretionary accruals is the key driver of the kink. We caution the use ...

We predict and find that accounting restatements induce economically meaningful share price declines among non-restatement firms in the same industry. These price declines are most pronounced among non-restatement firms with low accounting quality, as measured by industry adjusted accruals. Our results are consistent with the notion that accounting restatements cause investors to reassess the c...