Empirical Research On Earnings Predictability Of Accruals

Earnings information is the key to affect investment decision-making information, and earnings persistence is an important indicator of measured earnings information. At the same time, earnings persistence guarantee the earnings forecast based on earnings. Under the accrual, accounting accruals refers to the rest of earnings deduct cash flow, accruals as part of earnings should be inherited the nature of the earnings, and earnings persistence is the basis of earnings predictability of accruals.In this paper new accounting standards as the a time set apart, we select all the listed companies issuing A Shares during the2007to2009year in Shanghai and Shenzhen Stock Exchange, we study the future earnings predictability of accruals. Specifically, test on the earnings and stock returns predictability of accruals from the company’s tow aspects of financial and market performance. As for financial performance, we test the accruals persistence and the relationship between the accruals and future earnings. We found that the cash flow has generally more predictive power in forecasting the next year’s earning than accruals, between the accruals and future earnings have significant negative correlation, and this phenomenon is most outstanding in2007. So we basically confirmed that the future earnings predictability of accruals.As for market performance, we test the relationship between the accruals and future stock returns. We found that between the accruals and future stock returns have significant negative correlation, but this phenomenon has not significant in2009. We also found single variable regression results and multivariable regression results are basically the same, so we confirmed that the future stock returns predictability of accruals. Further analysis, the earnings predictability of accruals may be in certain degree has been affected by company’s fundamental (company size). So whether from the company’s financial performance aspects or market performance all confirmed the earnings predictability of accruals. We think that the reasons for the negative correlation between the accruals and future earnings and the negative correlation between the accruals and future stock returns, because investors do not recognize accruals. Compared cash flow, accruals more subjectivity, easy to manipulating earnings by management, but we can use accruals information constructing portfolio to get excess returns. In this paper we study the earnings predictability of accruals on the implementation of the new accounting standards, which is of great realistic for perfect accounting information disclosure system and cultivate investor’s rational decision. Our future research should adopt testing method of more suitable for our country, deeper research in the accruals, which leading investor make effective decision, promoting the steady and healthy development of our stock market.