The Relation between Long-Term Accruals and Operating Cash Flows
Implications for the Persistence and Value Relevance of Earnings
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The essential theme of accounting lies in accrual accounting. Many studies have explored behaviors of working capital accruals, but few have looked at long-term accruals. This study investigates the effect of conservative reporting on the relation between long-term accruals and operating cash flows. I find that the discretionary portion of depreciation accruals has a strong, negative relation with future operating cash flows. As depreciation accruals are inherently negative as an earnings component, this implies that higher discretionary depreciation is associated with higher future cash flows...
The essential theme of accounting lies in accrual accounting. Many studies have explored behaviors of working capital accruals, but few have looked at long-term accruals. This study investigates the effect of conservative reporting on the relation between long-term accruals and operating cash flows. I find that the discretionary portion of depreciation accruals has a strong, negative relation with future operating cash flows. As depreciation accruals are inherently negative as an earnings component, this implies that higher discretionary depreciation is associated with higher future cash flows. This finding is consistent with the hypothesis, that conservative reporting reveals managers? expectations of superior future performance. I also document that this negative relation depresses earnings persistence. However, the market ignores the lower earnings persistence and places a higher valuation weight on earnings for firms that are more conservative in reporting their depreciation.This study makes several contributions to scholars and students who are interested in accrual accounting, conservative reporting and earnings attributes.
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