tailieunhanh - Accounting earnings and cash flows as measures of firm performance The role of accounting accruals

A surge in expenditure after payday could also reflect stockpiling of durable goods. Households might try to minimize transaction costs of shopping by buying all of their durable goods in one large shopping trip. Given the presence of binding credit constraints, and even a slight degree of impatience, households could choose to time this large shopping trip at the beginning of each pay period. In this case the decline we observe in expenditure need not indicate a decline in consumption, because households could choose smooth consumption of durable goods over the pay period after stockpiling at the beginning. Column (4) shows that stockpiling is not an adequate. | ELSEVIER Journal of Accounting and Economics 18 1994 3-42 JOURNAL OF Accounting Economics Accounting earnings and cash flows as measures of firm performance The role of accounting accruals Patricia M. Dechow Wharton School University of Pennsylvania Philadelphia PA 19104-6365 USA Received October 1992 final version received September 1993 Abstract This paper investigates circumstances under which accruals are predicted to improve earnings ability to measure firm performance as reflected in stock returns. The importance of accruals is hypothesized to increase i the shorter the performance measurement interval ii the greater the volatility of the firm s working capital requirements and investment and financing activities and iii the longer the firm s operating cycle. Under each of these circumstances cash flows are predicted to suffer more severely from timing and matching problems that reduce their ability to reflect firm performance. The results of empirical tests are consistent with these predictions. Key words Capital markets Accruals Operating cycle Timing and matching problems Summary measures of performance JEL classification C52 G14 M41 I am grateful for the encouragement and guidance from Ross Watts Ray Ball . Kothari Jay Shanken and Jerry Zimmerman the editor . This paper has benefited from Sudipta Basu Fischer Black Michele Daley Neil Fargher Stephen Fisher Bob Holthausen Krishna Palepu Terry Shevlin Amy Sweeney and Peter Wilson. I am also grateful to Dan Collins the referee and Richard Sloan for many insightful comments and to Philip Kearns for his help on nonnested model selection techniques. The paper has benefited from workshop participants at University of Chicago Columbia University Harvard University Massachusetts Institute of Technology University of Michigan Northwestern University University of Rochester Wharton School of the University of Pennsylvania and Yale University. 0165-4101 94 1994 Elsevier Science . All rights reserved SSD1