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Expected Accrual Models: The Impact of Operating Cash Flows and Reversals of Accruals

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  • Jinhan Pae

Abstract

This paper augments the Jones (1991) model with operating cash flows and lagged accruals to evaluate the impact of (1) the negative association between accruals and concurrent cash flows, (2) the positive association between accruals and lagged cash flows, and (3) the reversal of accruals. I find that operating cash flows greatly improve the explanatory and predictive power of the Jones model; but, lagged accruals do not. A market test of the expected and unexpected components of accruals indicates that unexpected accruals are on average informative with respect to concurrent stock returns; however, the market does not fully understand the implications of accruals anticipated at the beginning of the return period. Copyright Springer Science + Business Media, Inc. 2005

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  • Jinhan Pae, 2005. "Expected Accrual Models: The Impact of Operating Cash Flows and Reversals of Accruals," Review of Quantitative Finance and Accounting, Springer, vol. 24(1), pages 5-22, January.
    • Handle: RePEc:kap:rqfnac:v:24:y:2005:i:1:p:5-22
    DOI: 10.1007/s11156-005-5324-7
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    6. Henrique Formigoni & Maria Thereza Pompa Antunes & Edilson Paulo, 2009. "Difference between Accounting Profit and Taxable Profit: An Analysis of Management of Accounting Results and Tax Management at Brazilian Public Companies," Brazilian Business Review, Fucape Business School, vol. 6(1), pages 42-58, January.
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    9. Wil Martens & Prem Yapa & Maryam Safari, 2021. "Earnings Management in Frontier Market: Do Institutional Settings Matter?," Economies, MDPI, vol. 9(1), pages 1-19, February.
    10. Cristiano Machado Costa & José Mauro Madeiros Velôso Soares, 2022. "Standard Jones and Modified Jones: An Earnings Management Tutorial," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(2), pages 200305-2003.
    11. Carlos F. Alves & Ernesto Fernando R. Vicente, 2012. "Does the Latin Corporate Governance Model perform worse than others in preventing earnings management?," FEP Working Papers 447, Universidade do Porto, Faculdade de Economia do Porto.
    12. Edilson Paulo & Paulo Roberto Nóbrega Cavalcante & Iana Izadora Souza Lapa de Melo, 2012. "Accounting information quality in public stock and bond offerings by brazilian public companies," Brazilian Business Review, Fucape Business School, vol. 9(1), pages 1-24, January.
    13. Boachie, Christopher & Mensah, Emmanuel, 2022. "The effect of earnings management on firm performance: The moderating role of corporate governance quality," International Review of Financial Analysis, Elsevier, vol. 83(C).
    14. Joseph Akadeagre Agana & Kwame Mireku & Kingsley Opoku Appiah, 2015. "Comparative Predictive Abilities of Earnings and Operating Cash Flows on Future Cash Flows: Empirical Evidence from Ghana," Accounting and Finance Research, Sciedu Press, vol. 4(3), pages 1-40, August.
    15. De Andrés Fazio, Salvador & Urquía Grande, Elena & Pérez Estébanez, Raquel, 2022. "The “secret life” of the Statement of Cash Flow: A bibliometric analysis," Cuadernos de Gestión, Universidad del País Vasco - Instituto de Economía Aplicada a la Empresa (IEAE).

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