Accruals and future performance: can it be attributed to risk?

Review of Accounting Studies

Accounting

Review of Accounting Studies 2015 Vol 20:4 p 1297-1333

Momente F;Reggiani F;Richardson S A

Scott Richardson

2015

We decompose broad based measures of accruals into firm specific and related firm components. We find that the negative relation between accruals and future firm performance is almost entirely attributable to the firm specific component. Standard risk based explanations are hard to reconcile with this fact. To the extent expected returns have a common component spanning related firms, a risk based explanation would suggest a stronger negative relation between accruals and future firm performance when related firms are also growing. Instead, the attenuation we document is more likely attributable to sub-optimal investment decisions, which the stock market and analysts do not incorporate in a timely manner.

Investment activity; Accruals; Profitability; Stock returns; Supply chain

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