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Persistence of Accruals and Cash Flows in Predicting Future Cash Flows
C.S. Agnes Cheng,
Louisiana State University / University Of Houston
ABSTRACT. This study extends the model developed by Dechow, Kothari and Watts (1998) and contrasts the coefficients (termed as persistence in this paper) on cash flows and on current accruals in predicting future cash flows. Conventional wisdom suggests that lower accruals quality will cause lower persistence on accruals. Our extended model indicates that sales growth shall drive down persistence of current accruals in predicting future cash flows. The results are stronger after we control for accruals quality and varying operating cash cycles. Our findings have important implications to the ongoing debate on the informativeness of accruals: studies that rely on persistence of accruals in measuring earnings or accruals quality should control for growth and varying operating cash cycles.
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