Premium
The Usefulness of Long‐Term Accruals
Author(s) -
Guay Wayne R.,
Sidhu Baljit K.
Publication year - 2001
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/1467-6281.00076
Subject(s) - accrual , explanatory power , earnings , cash flow , econometrics , term (time) , context (archaeology) , measure (data warehouse) , economics , business , accounting , computer science , paleontology , philosophy , physics , epistemology , quantum mechanics , database , biology
Though empirical evidence strongly supports the role of short‐term operating accruals in improving operating cash flows as a measure of performance, there is little support or consensus with respect to the effect of long‐term accruals. We provide evidence that long‐term accruals do reduce timing and matching problems in cash flows. In return‐earnings regressions, long‐term accruals are found to improve earnings as a measure of firm performance, although not to the same extent as short‐term accruals. Further, our analysis highlights differences in economic and statistical properties between short‐term and long‐term accruals and demonstrates how these differences impede the ability of long‐term accruals to improve earnings as a performance measure in a return‐earnings context. The incremental explanatory power of long‐term accruals is shown to be hampered by the lack of present‐value considerations in the existing accounting model, timeliness problems, and measurement error in the indirect method of computing cash flows and accruals.