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The Usefulness of Long‐Term Accruals

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  • Wayne R. Guay
  • Baljit K. Sidhu

Abstract

Though empirical evidence strongly supports the role of short‐term operating accruals in improving operating cash flows as a measure of performance, there is little support or consensus with respect to the effect of long‐term accruals. We provide evidence that long‐term accruals do reduce timing and matching problems in cash flows. In return‐earnings regressions, long‐term accruals are found to improve earnings as a measure of firm performance, although not to the same extent as short‐term accruals. Further, our analysis highlights differences in economic and statistical properties between short‐term and long‐term accruals and demonstrates how these differences impede the ability of long‐term accruals to improve earnings as a performance measure in a return‐earnings context. The incremental explanatory power of long‐term accruals is shown to be hampered by the lack of present‐value considerations in the existing accounting model, timeliness problems, and measurement error in the indirect method of computing cash flows and accruals.

Suggested Citation

  • Wayne R. Guay & Baljit K. Sidhu, 2001. "The Usefulness of Long‐Term Accruals," Abacus, Accounting Foundation, University of Sydney, vol. 37(1), pages 110-131, February.
    • Handle: RePEc:bla:abacus:v:37:y:2001:i:1:p:110-131
    DOI: 10.1111/1467-6281.00076
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    Cited by:

    1. Tami Dinh Thi & Wolfgang Schultze, 2011. "Capitalizing research & development and ‘other information’: the incremental information content of accruals versus cash flows," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 22(3), pages 241-278, November.
    2. Waqas Bin Khidmat & Man Wang & Sadia Awan, 2018. "Corporate governance, earnings management and the value-relevance of accounting information: Evidence from Pakistan," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 1-31, September.
    3. Shadi Farshadfar & Reza M. Monem, 2019. "Further evidence of the relationship between accruals and future cash flows," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(1), pages 143-176, March.
    4. Wayne Guay, 2006. "Discussion of The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition," Journal of Accounting Research, Wiley Blackwell, vol. 44(2), pages 243-255, May.

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