Outline

  • Abstract
  • Keywords
  • 1. Introduction
  • 2. Related Research
  • 3. Sample Selected and Methodology
  • 3.1 the Magnitude of Earnings Quality
  • 3.2 the Accruals Effects on Stock Returns
  • 4. Predictive Power of Accruals Components
  • 4.1 Discretionary and Non-Discretionary Accruals
  • 5. Summary and Conclusion
  • References
  • Notes
  • Copyrights

رئوس مطالب

  • چکیده
  • کلمات کلیدی
  • 1. پیشگفتار
  • 2. تحقیقات مربوطه
  • 3. نمونه‌ی انتخاب شده و متدولوژی
  • 3.1. اندازه‌ی کیفیت درآمدها
  • 3.2. تاثیرات اقلام تعهدی روی بازده‌های سهام
  • 4. توان پیش‌بینی کننده‌ی مولفه‌های اقلام تعهدی
  • 4.1. اقلام تعهدی احتیاطی و غیر احتیاطی
  • 5. خلاصه و نتیجه‌گیری

Abstract

A failure to beat earnings expectations often results in an immediate fall in a firm’s stock price, while exceeding market expectations is normally rewarded by investors in the form of an increased stock price. As a result, managers may have a vested interest in ‘managing’ the reported earnings growth when remuneration packages are linked to corporate profitability. Investors may be misled by this earnings management process if they are fail to consider the quality of earnings when assessing stock returns. Investors can determine earnings quality through the information disclosures provided by management, although such information may not be routinely provided by corporate management teams. In situations where the market focuses primarily on firms’ reported income and fails to consider the quality of accounting earnings, there may be temporary divergence of stock prices from their correct values. Where the market focuses on the reported income figure in a firm’s income statement it fails to consider information about earnings quality, such as the disclosures about working capital accruals. The Financial Accounting Standards Board (FASB) states that the usefulness of accounting information is the principal objective of financial statements (FASB, 1978). This paper investigates whether the usefulness of accounting information in the decision making process is enhanced by recognizing the impact that information about earnings quality may have on stock returns. More specifically, the paper focuses on the impact of accounting accruals as the main measurement and indicator of earnings quality.

Keywords: - -

5. Summary and Conclusion

Within the academic literature, the consensus view is that investors and analysts have traditionally focused on reported ‘bottom-line’ reported measures of income and typically ignored the decision-relevant information contained with other financial statement items and disclosures. Although, ‘bottom-line’ income has important information content, it cannot provide information about the quality of these earnings. Earnings quality is an important predictor of a firm’s future returns and is heavily influenced by the use of discretionary and nondiscretionary accruals by management.

Existing empirical accounting research has found a negative relationship between accruals and future stock returns. Accruals play an important role in linking earnings surprises and returns. Increases in reported earnings that are accompanied by high levels of accruals possibly should provide information about the level of earnings quality. This present study builds on earlier work by Sloan (1996), Xie (2001) and Chan et al. (2006) and provides empirical evidence using U.K. data that shows that accruals are associated with, and can also predict, returns.

Using a unique process for separating accruals into discretionary and nondiscretionary components, the link between accruals and operating performance is explored in years in which accruals rise significantly. This paper provides an empirical model of accruals components to investigate their link with future returns. The results suggest that working capital accruals, such as changes in accounts receivables and inventory, appear to contain important information about the earnings quality of firms and can help to predict the of future returns.

In the absence of earnings manipulation by management, information about accruals appears to provide important indicators about changes in a firm’s business prospects. From our analysis it appears that a substantial increase in accruals marks a turning point in the wealth of a firm. Where a company reports a rapid increase in accruals following high stock returns and earnings growth in previous years, the company appears to suffer and its growth rate goes back to a more normal rate. Its earnings in following years would stay positive but fall along with its stock price. The year of high accruals appears to provide a signal that the firm’s past growth rate cannot be sustained. Thus, firms with high level of accruals may provide warning signs about a cooling in their corporate growth. While the use of creative accounting and earnings manipulation by management could delay exposure of this bad news, it must eventually be revealed.

The results of our analysis also suggest that the outcome from increased levels of accruals is not exclusively determined by changing in business conditions. Each accruals component appears to have a different degree of power for predicting returns. When accruals is separated into discretionary and nondiscretionary components, the discretionary component is the main provider of the predictability in returns.

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