2001/05/01 by Konan Chan, Louis K. C. Chan, Louis K.C. Chan +2 · 112 citations
Business, Management and Accounting · Economics, Econometrics and Finance · Engineering · #Accounting #Accrual #Auditing, Earnings Management, Governance #Business #Cash flow #Earnings #Earnings management #Earnings quality #Earnings response coefficient #Econometrics #Economics #Engineering #Financial Markets and Investment Strategies #Financial Reporting and Valuation Research #Monetary economics #Operating cash flow #Predictive power #Robustness (evolution) #Stock (firearms)
paper · open access · doi:10.1086/500669
published in The Journal of Business 79(3), 1041-1082 (University of Chicago Press)
openalex publication_date 2001/05/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04
An exclusive focus on bottom-line income misses important information contained in accruals (the difference between accounting earnings and cash flow) about the quality of earnings. Earnings increases that are accompanied by high accruals, suggesting low-quality earnings, are associated with poor future returns. We explore various hypothesesearnings manipulation, extrapolative biases about future growth, and underreaction to changes in business conditionsto explain accruals' predictive power. Checks for robustness using within-industry comparisons and data on U.K. stocks are also provided.