The Role of Short- Versus Long-Term Accruals: A Re- Assessment and Extension

Posted: 15 Jul 1998

See all articles by Wayne R. Guay

Wayne R. Guay

University of Pennsylvania - Accounting Department

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting

Date Written: November 1995

Abstract

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

Guay, Wayne R. and Sidhu, Baljit K., The Role of Short- Versus Long-Term Accruals: A Re- Assessment and Extension (November 1995). Available at SSRN: https://ssrn.com/abstract=2542

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

Baljit K. Sidhu (Contact Author)

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

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