Journal
JOURNAL OF ACCOUNTING & ECONOMICS
Volume 39, Issue 3, Pages 437-485Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jacceco.2005.04.005
Keywords
accruals; reliability; earnings persistence; capital market; market efficiency
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This paper extends the work of Sloan (1996. The Accounting Review 71, 289) by linking accrual reliability to earnings persistence. We construct a model showing that less reliable accruals lead to lower earnings persistence. We then develop a comprehensive balance sheet categorization of accruals and rate each category according to the reliability of the underlying accruals. Empirical tests generally confirm that less reliable accruals lead to lower earnings persistence and that investors do not fully anticipate the lower earnings persistence, leading to significant security mispricing. These results suggest that there are significant costs associated with incorporating less reliable accrual information in financial statements. (c) 2005 Elsevier B.V. All rights reserved.
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