Sloan (1996)

Reference

Do Stock Prices Fully Reflect Information in Cash Flows and Accruals About Future Earnings?^aaa

Richard G. Sloan

The Accounting Review, Volume 71, Issue 3 (July, 1996), 289-315.

Synopsis

This paper shows that the accrual component of earnings is less persistent than the cash flow component of earnings, but that this difference is not reflected in stock prices. An investment strategy that goes long in low accrual firms and short in high accruals firms yields annual hedge portfolio returns in excess of 10%. High (low) accruals are indicative of aggressive (conservative) accounting, and so this paper documents significant returns to a very basic earnings quality strategy. In hindsight, the definition of accruals used in this paper (primarily working capital accruals) is incomplete. [see Richardson, Sloan, Soliman and Tuna (2002)].