Konan Chan Louis K. C. Chan Narasimhan Jegadeesh Josef Lakonishok
Abstract
An exclusive focus on bottom-line income misses important information about the quality of earnings. Accruals (the difference between accounting earnings and cash flow) are reliably, negatively associated with future stock returns. Earnings increases that are accompanied by high accruals, suggesting low-quality earnings, are associated with poor future returns. We explore various hypotheses -- earnings manipulation, extrapolative biases about future growth, and under-reaction to business conditions -- to explain accruals' predictive power. Distinctions between the hypotheses are based on evidence from operating performance, the behavior of individual accrual items, and discretionary versus nondiscretionary components of accruals.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
8308.
Length: Date of creation: May 2001 Date of revision: Handle: RePEc:nbr:nberwo:8308
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Find related papers by JEL classification: G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Degeorge, Francois & Patel, Jayendu & Zeckhauser, Richard, 1999.
"Earnings Management to Exceed Thresholds,"
Journal of Business,
University of Chicago Press, vol. 72(1), pages 1-33, January.
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