Abstract

After Sloan published his seminal paper of accruals anomaly in 1996, many studies showed that accrual persistence is lower than cash flow persistence while examining accruals anomaly, which is attributed to managers’ subjectivity in the accounting process. According to the belief, most studies provide the evidence that the estimation error of accruals results in lowered accruals quality’ leading to lowered accrual persistence. In addition to these prior studies, this study examined whether accrual persistence is well explained with accrual reliability suggested by Richardson et al.(2005, hereafter RSST). Related to accrual reliability, RSST argued and evidenced that accrual persistence is lowered with the decrease in accrual reliability. However, RSST didn’t provide the perfect evidence of their argument in that they separated accruals into sub－components of accruals and gave them the reliability level based on their own subjective judgements, instead of estimating directly the accrual reliability. To promote RSST’s results, this study estimated directly the accrual reliability, following RSST’s definition of accrual reliability, through dividing the variance of accrual estimation error by the variance of accruals and examined the relation between the accrual persistence and the directly estimated accrual reliability. The results are as follows. Consistent with RSST’s arguments, the accrual persistence becomes lower(higher) with the decrease(increase) in accrual reliability. In addition, this result is not changed in the following situations：1) in the situation that the accrual reliability is standardized into the range of [0, 1], 2) in the situation that the sample is limited to 1999－2009 when KIFRS is not applied, 3) in the situation that the accrual reliability is measured using standard deviation instead of variance, and 4) in the situation that the accrual estimation error is measured using the method used in Ball and Shivakumar(2006).

Keywords

• Accrual reliability
• Accrual estimation error
• Accrual persistence

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