The Influence of the Accruals Generating Process on Earnings Persistence

Posted: 14 Nov 2014

See all articles by Brett J. Govendir

Brett J. Govendir

University of Technology Sydney (UTS); Financial Research Network (FIRN)

Peter Alfred Wells

University of Technology Sydney, Accounting Discipline Group ; Financial Research Network (FIRN)

Date Written: November 13, 2014

Abstract

In this paper we categorise accruals on the basis of how they are generated, and empirically evaluate whether this categorisation provides additional insights into future earnings and is relevant to the estimation of firm value. Specifically, we categorise accruals on the basis of whether the underlying cash flows lead or lag earnings recognition, and whether the accruals are initiating or reversing (i.e. a four-way categorisation). We demonstrate that these accrual categories are not homogeneous, have differing implications for earnings persistence and are relevant for firm valuation. Significantly, where cash flows lag earnings recognition (e.g. sales made on credit) they have greater implications for future earnings than where cash flows lead earnings (e.g. unearned revenues) and depreciation. Similarly, initiating accruals have greater implications for the persistence of earnings than reversing accruals. Paradoxically, while depreciation exhibits high persistence, it has less of an implication for the persistence of earnings than either lag or initiating earnings categories. These findings enhance our understanding of the properties of accounting income and how it is impounded into share prices.

Keywords: Accrual anomaly, accruals categories, accruals components

Suggested Citation

Govendir, Brett J. and Wells, Peter Alfred, The Influence of the Accruals Generating Process on Earnings Persistence (November 13, 2014). Australian Journal of Management, Vol. 39, No. 4, 2014, Available at SSRN: https://ssrn.com/abstract=2523914

Brett J. Govendir (Contact Author)

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia
+61 2 95143582 (Phone)

HOME PAGE: http://www.business.uts.edu.au/

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Peter Alfred Wells

University of Technology Sydney, Accounting Discipline Group ( email )

P.O. Box 123
Broadway NSW 2007
Australia
+61 (02) 9514 3628 / 3629 (Phone)
+61 (02) 9514 5515 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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