Richardson et al. (2002)

Reference

Information in Accruals About Earnings Persistence and Future Stock Returns^aaa

Scott A. Richardson, Richard G. Sloan, Mark T. Soliman and Irem Tuna

Working Paper (December, 2002).

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Synopsis

This paper extends the definition of accruals used by Sloan (1996) to incorporate noncurrent operating accruals and financing accruals. Sloan's original paper focuses on current operating (i.e., working capital) accruals. This paper shows that noncurrent operating accruals and long-term financial asset accruals are also associated with lower earnings persistence and predictable future stock returns. The mean hedge portfolio return to a composite measure of accruals that combines current operating accruals, noncurrent operating accruals and long-term financial asset accruals exceeds 18%. This particular hedge portfolio return is not reported in the paper. Table 8 of the paper reports hedge portfolio returns of 11.9% for DWC, 15.3% for DNCO and 3.3% for DLTI. In unreported results (mentioned in their conclusion), the authors achieve the 18% hedge portfolio return using the composite accrual measure DWC+DNCO+DLTI. These accrual components are defined in Table 1 of the paper.