Research on accrued earnings and growth about future profitability in China

Abstract

After Sloan (1996) draws the idea that future earnings management is less persistent by using accrual method compared to the cash flow method, researchers keep tracking this issue within a decade. One group of argue rise accounting distortions as a main factor to explain the lower persistence of accrued earnings (Richardson et al. 2006; Wu and Fargher 2007; Dechow and Dichev 2002). The other people think this result is related to growth elements, such as return on assets (Fairfield et al. 2003). In this research paper, I follow the second stream to illustrate why it is less persistence by using accrual methods and the economic background is switched to the Chinese market. Empirically, I find both the growth on long-term net operating assets and accruals have negative coefficients with the one-year-ahead ROA. This showing result is partially due to accounting conservatism as well as the lower investment returns.