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Articulation-based accruals

Author

Listed:
  • Ryan Casey

    (University of Denver)

  • Feng Gao

    (Rutgers Business School)

  • Michael Kirschenheiter

    (University of Illinois at Chicago)

  • Siyi Li

    (University of Illinois at Chicago)

  • Shailendra Pandit

    (University of Illinois at Chicago)

Abstract

We build an articulating financial statements model in which the beginning and ending balance sheet amounts are explicitly linked to accruals. We distinguish accruals based on the source financial statement of the accruals, either the cash flow statement, balance sheet, or statement of owners’ equity. We then examine how the accrual-generating source affects the relations between accruals and future earnings and stock returns. While prior studies document a negative association between accruals and future earnings and returns, we find accruals relating to the current operating section of the balance sheet are positively associated with future earnings. Further, accruals originating from net financial asset via the statement of owners’ equity are positively associated with future returns. We also show that equity investment and discontinued asset accruals differ from operating asset accruals in their association with future earnings.

Suggested Citation

  • Ryan Casey & Feng Gao & Michael Kirschenheiter & Siyi Li & Shailendra Pandit, 2017. "Articulation-based accruals," Review of Accounting Studies, Springer, vol. 22(1), pages 288-319, March.
    • Handle: RePEc:spr:reaccs:v:22:y:2017:i:1:d:10.1007_s11142-016-9385-8
    DOI: 10.1007/s11142-016-9385-8
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    References listed on IDEAS

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    2. Richardson, Scott A. & Sloan, Richard G. & Soliman, Mark T. & Tuna, Irem, 2005. "Accrual reliability, earnings persistence and stock prices," Journal of Accounting and Economics, Elsevier, vol. 39(3), pages 437-485, September.
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    Cited by:

    1. Nallareddy, Suresh & Sethuraman, Mani & Venkatachalam, Mohan, 2020. "Changes in accrual properties and operating environment: Implications for cash flow predictability," Journal of Accounting and Economics, Elsevier, vol. 69(2).
    2. Davis, Frederick & Khadivar, Hamed, 2024. "Accrual and real earnings management by rumored takeover targets," International Review of Financial Analysis, Elsevier, vol. 92(C).
    3. Theodore E. Christensen & Adrienna Huffman & Melissa F. Lewis‐Western & Rachel Scott, 2022. "Accruals earnings management proxies: Prudent business decisions or earnings manipulation?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(3-4), pages 536-587, March.
    4. Chad R. Larson & Richard Sloan & Jenny Zha Giedt, 2018. "Defining, measuring, and modeling accruals: a guide for researchers," Review of Accounting Studies, Springer, vol. 23(3), pages 827-871, September.
    5. Heater, John C. & Nallareddy, Suresh & Venkatachalam, Mohan, 2021. "Aggregate accruals and market returns: The role of aggregate M&A activity," Journal of Accounting and Economics, Elsevier, vol. 72(2).

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