Accrual Reversals, Earnings and Stock Returns

We document pervasive evidence of reversals in firm-level working capital accruals over adjacent fiscal years. We demonstrate that the majority of these accrual reversals relate to ‘good’ accruals that: (i) correctly anticipate future benefits; (ii) lead to higher earnings persistence; and (iii) are not associated with security mispricing. We show that the lower persistence of the accrual component of earnings and associated mispricing...