Journal of Accounting and Economics Vol. 39 No. 3 2005

Accrual reliability, earnings persistence and stock prices

Scott Richardson^1,2; Richard G. Sloan^3,4,5; Mark T. Soliman^3,6; İrem Tuna^1,2

¹ London Business School · ² University of Pennsylvania · ³ University of Southern California · ⁴ Ross School · ⁵ University of Michigan–Ann Arbor · ⁶ Stanford University

Abstract

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.

DOI

10.1016/j.jacceco.2005.04.005

Volume

39

Issue

3

Pages

437-485

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓