Explaining accruals quality over time

Abstract

We provide evidence that accruals quality in the U.S. has generally improved since 2000, following a decade of decline during the 1990s. Our results indicate that both the initial decline in accruals quality and the subsequent reversal can be explained by an inverse relation with operating cash flow volatility. Moreover, even though patterns of cash flow volatility and accruals quality vary in different regions of the world and relative to the U.S., we find evidence of an inverse relation between accruals quality and cash flow volatility globally. We corroborate our main results in a battery of additional tests, which also indicate that our results are not attributable to other explanations. Overall, our evidence challenges conventional wisdom and suggests that concerns about a sustained decline in accruals quality over time are unwarranted.