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Intangible Investments, Scaling, and the Trend in the Accrual–Cash Flow Association

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  • JEREMIAH GREEN
  • HENOCK LOUIS
  • JALAL SANI

Abstract

We provide evidence that the documented weakening of the accrual–cash flow association results not from a loss of accrual accounting usefulness per se, but from the deviation from accrual accounting as it relates to intangible investments. More specifically, the weakening of the negative association is driven by the combined effects of (1) increasing intangible investments, (2) the practice of expensing rather than capitalizing intangible investments, and (3) scaling accruals and cash flows by book value of assets, which are understated for intangible‐intensive firms. Treating intangible expenditures as capitalized investments and scaling accruals and cash flows by market value of equity, which reflects the value of intangible investments, (1) substantially strengthens the negative association between accruals and cash flows and (2) practically eliminates the apparent weakening trend in the association.

Suggested Citation

  • Jeremiah Green & Henock Louis & Jalal Sani, 2022. "Intangible Investments, Scaling, and the Trend in the Accrual–Cash Flow Association," Journal of Accounting Research, Wiley Blackwell, vol. 60(4), pages 1551-1582, September.
    • Handle: RePEc:bla:joares:v:60:y:2022:i:4:p:1551-1582
    DOI: 10.1111/1475-679X.12414
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    2. Antonelli, Cristiano & Orsatti, Gianluca & Pialli, Guido, 2023. "Out of Equilibrium and Intangible Assets," Department of Economics and Statistics Cognetti de Martiis. Working Papers 202323, University of Turin.
    3. Anup Srivastava, 2023. "Trivialization of the bottom line and losing relevance of losses," Review of Accounting Studies, Springer, vol. 28(3), pages 1190-1208, September.
    4. Krivogorsky, Victoria & Mintchik, Natalia & Alon, Anna, 2023. "Accounting research in former Soviet bloc countries: Past trends and current and future developments," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).

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