Scandinavian Working Papers in Business Administration
Financial Reporting Research Group Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies
No R-2006-03: The accrual anomaly – focus on changes in specific unexpected accruals results in new evidence.
Finn Schøler ()
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Finn Schøler: Department of Management Science and Logistics, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Abstract: This paper deals with the accrual anomaly first documented by Sloan (1996), i.e. the finding that the stock market prices appear to overweigh the role of accruals persistence and under-weigh the role of operating cash flow persistence. In an analysis based on Danish financial statement data it is demonstrated that different specific components of earnings have significantly different earnings persistence characteristics and that these differences are not fully reflected in share prices.
In the analysis presented here the earnings persistence effect of two particular unexpected accrual components are specifically analyzed, namely the unexpected inventory accrual component and the unexpected accounts receivable accrual component, i.e. changes in accruals not motivated by corresponding changes in company activity-level. Additionally and for comparison, the accounting accruals are split into expected and unexpected accruals, estimated by the extended Jones model like in both some US-analyses and some international studies of the accrual anomaly phenomenon.
It is found that the persistence of earnings is decreasing in the magnitude of the unexpected accrual components of earnings and that the persistence of current earnings performance is particularly decreasing in the magnitude of unexpected changes in inventory. The special accrual parts are related to the perceptions of earnings persistence implicit in the market prices, and it is found that the differences in earnings persistence are not rationally reflected by share price differences
Keywords: Discretionary accruals; Earnings management; Earnings Persistence; Accrual anomaly
25 pages, June 26, 2006
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