Interpreting accruals as working capital investment, we hypothesize based on q-theory that firms optimally adjust their accruals in response to discount rate changes. A higher discount rate means less profitable investments and lower accruals, and a lower discount rate means more profitable investments and higher accruals. Our evidence supports this optimal investment hypothesis: (1) adding an ...

Prior accounting research argues that diminishing marginal returns on new investments drive lower persistence of accruals relative to cash flows. Macroeconomic research documents that marginal profitability is counter-cyclical, which implies that diminishing marginal returns on new investments are more pronounced during periods of expansions than recessions. Linking the cyclicality of diminishi...

In this study, I investigate whether market learning explains the absence of the accrual anomaly in recent years by examining three conditions associated with the presence of the anomaly in prior research: (i) a differential relation between future earnings and cash flows versus accruals, (ii) incorrect weighting of cash flows and accruals by investors when predicting earnings, and (iii) associ...

Prior research has estimated piece-meal the determinants of audit fees, non-audit fees and abnormal accruals. Intuition, informal analysis, and a variety of theories suggest that audit fees, non-audit fees, and abnormal accruals are jointly determined. We address this endogeneity issue by modeling the confluence of audit fees, fees for non-audit services and abnormal accruals in a system of sim...

This study examines whether firms just above and just below three earnings benchmarks (loss avoidance, earnings changes, and analyst forecast) have differing levels of discretionary accruals. If discretionary accruals are a measure of earnings management, then firms above (benchmark beaters) and firms below a benchmark should have differing levels of discretionary accruals. Dechow et al. (2003)...

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 documents a subtle and counter-intuitive interaction between operating cash flow (CFO) and accruals, and their association with future stock returns. While the two strategies should by construction capture similar anomalies, we find evidence in two large stock markets that they appear distinct, and that returns to these strategies are strongly negatively correlated. We show that the ...

We examine how the criteria for choosing estimation samples (peer firms) affect the ability to detect discretionary accruals, using several variants of the Jones (1991) model. Researchers commonly estimate accruals models in cross-section, and define the estimation sample as all firms in the same industry. We examine whether firm size performs at least as well as industry membership as the crit...