The predictive power of investment and accruals

Jonathan Lewellen () and Robert J. Resutek ()
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Jonathan Lewellen: Dartmouth College
Robert J. Resutek: University of Georgia

Review of Accounting Studies, 2016, vol. 21, issue 4, No 2, 1046-1080

Abstract: Abstract We test whether investment explains the accrual anomaly by splitting total accruals into investment-related and “nontransaction” accruals, items such as depreciation and asset write-downs that do not represent new investment expenditures. The two types of accruals have very different predictive power for firm performance, not just for future earnings but also for future cash flow and stock returns. Most importantly, nontransaction accruals have the strongest negative predictive slopes for earnings and stock returns, contrary to the predictions of the investment hypothesis. A long-short portfolio based on nontransaction accruals has a significant average return of 0.71 % monthly from 1972 to 2010 and remains profitable at the end of the sample when returns on other accrual strategies decline. Our results suggest that nontransaction accruals are the least reliable component of accruals and show that a significant portion of the accrual anomaly cannot be explained by investment.

Keywords: Earnings persistence; Accruals; Investment; Stock returns; Anomalies (search for similar items in EconPapers)
JEL-codes: G14 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11142-016-9369-8

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