The Role of Short- Versus Long-Term Accruals: A Re- Assessment and Extension
Posted: 15 Jul 1998
Date Written: November 1995
Following Dechow (1994) we investigate the relative usefulness (and economic significance) of short-versus long-term accruals in improving cash flows as a measure of performance. First, we re-examine Dechow's premise that long-term accruals are expected to be less useful than short-term accruals, arguing that the historical evidence is not sufficiently conclusive to inform our expectations. Second, alternative and more powerful tests are used to investigate the issue. Compared to short-term accruals, long-term accruals are found to add statistically significant, albeit smaller, increments in explanatory power to cash flows as a measure of performance. Third, extensions to Dechow (1994) provide the following insights. Our results are sensitive to the removal of potentially financially distressed firms and also those with relatively high growth options. The paper establishes the economic (as distinct from the statistical) significance of cash flows and both classes of accruals. The differential usefulness of accrual components is hypothesized, and found, to be a function of their relative materiality. Finally, utilizing only the depreciation component of long-term accruals worsens rather than improves cash flows as a measure of performance.
JEL Classification: C52, G14, M41
Suggested Citation: Suggested Citation