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Understanding the quality of a firm’s earnings is essential to developing confidence in its financial reports and making appropriate investment decisions. Generally, a high focus on a firm’s bottom line leads investors to overlook important information contained in financial accruals. Rising accruals along with a rise in earnings may indicate a poor quality of firm’s earnings. The current study is...
This paper investigates how analyst cash flow forecasts affect investors' valuation of accounting accruals. We find that the strength of the accrual anomaly documented in Sloan (1996) is weaker for firms with analyst cash flow forecasts, after controlling for idiosyncratic risk, transaction costs and firm characteristics associated with the issuance of cash flow forecasts. We further show that this...
We extend Healy (1985) by examining the relation between discretionary accruals and bonus plan bounds for a sample of 102 firms for the 1980-1990 period. Contrary to Healy, we find that when earnings before discretionary accruals fall below the lower bound, managers select income-increasing discretionary accruals (and vice versa). We believe that our results are more consistent with the income smoothing...
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