Accrual Information Research Articles

A Forward Looking Approach for Assessing the Loan Portfolio Quality of Commercial Banks

In this study, I provide a forward looking approach for assessing the loan portfolio quality of commercial banks. I first develop an accrual reliability categorization for financial institutions and show that existing findings for non-financial firms extend to financial firms. I next demonstrate how supplementing the information in accruals leads to significantly improved assessment of accrual quality. Focusing on commercial banks’ loan portfolios, I supplement information in accruals with footnote disclosures regarding loan portfolio concentrations and regional economic indicators. I show that the resulting loan portfolio quality index (PQI) further isolates less reliable accruals and significantly improves the forecasting of future earnings and stock returns.

Fundamentals or Managerial Discretion? The Relationship between Accrual Variability and Future Stock Return Volatility

This study extends the theoretical framework of Callen and Segal (2004) and Vuolteenaho (2002) to investigate the association between accrual variability and firm‐level stock return volatility. The empirical evidence supports our prediction that increased uncertainty in current‐period accounting accruals is associated with significantly higher volatility of future stock returns, and the results are valid for measures of both systematic and idiosyncratic volatility. When accrual variability is decomposed into fundamental and discretionary portions, we find that the positive relationship between accrual variability and future stock return volatility is dominated by the fundamental component of accrual variability. Overall, our results suggest that uncertainty reflected in accrual information is subsequently reflected in the fluctuation of future stock returns, and that the predictive content in accruals primarily reflects firms' fundamental uncertainty, rather than any effects of managerial choices and interventions in the accounting process.

Pancreatic Cancer Clinical Trials and Accrual in the United States

Pancreatic cancer clinical trials open in the United States and their accrual were examined to identify opportunities to accelerate progress in the treatment of pancreatic cancer. Pancreatic cancer-specific clinical trials open in the United States in the years 2011 and 2012 were obtained from the Pancreatic Cancer Action Network database. Accrual information was obtained from trial sponsors. The portfolio of pancreatic cancer clinical trials identified by type (adenocarcinoma or neuroendocrine), phase, disease stage, and treatment approach is reported. More than half of trials for patients with pancreatic ductal adenocarcinoma applied biologic insights to new therapeutic approaches, and 38% focused on optimization of radiation or chemotherapy delivery or regimens. In 2011, pancreatic cancer trials required total enrollment of 11,786 patients. Actual accrual to 93.2% of trials was 1,804 patients, an estimated 4.57% of the patients with pancreatic cancer alive in that year. The greatest need was for patients with resectable cancer. Trials open in 2011 enrolled an average of 15% of their total target accrual. Physician recommendations greatly influenced patients' decision to enroll or not enroll onto a clinical trial. Matching to a clinical trial within a 50-mile radius and identifying trials for recurrent/refractory disease were documented as challenges for patient accrual. Overall trial enrollment indicates that pancreatic cancer trials open in 2011 would require 6.7 years on average to complete accrual. These results suggest that harmonizing patient supply and demand for clinical trials is required to accelerate progress toward improving survival in pancreatic cancer.

Did Analysts Contribute to the Disappearance of the Accrual Anomaly?

We use the recent disappearance of the accrual anomaly to investigate analysts’ contribution to improved information processing by investors. Prior research finds that investors and analysts made accrual-related pricing and forecast errors, respectively, in the anomaly period. As sophisticated information intermediaries, analysts could have corrected their accrual-related forecast bias and thus provided a mechanism for investors to correct accrual-related mispricing. Using all-star status and the analyst’s provision of a cash flow forecast as proxies for expertise, we find that both expert and non-expert analysts continue to issue forecasts with predictable accrual-related bias after the disappearance of the accrual anomaly. Furthermore, the accrual anomaly is similar for firms followed by analysts and for non-followed firms, and disappears at the same time for both. Thus, investors began to correctly incorporate accruals information in security prices even though analysts continued issuing earnings forecasts that have predictable accrual-related bias. Our results conflict with the widely-held notion that analysts are sophisticated information intermediaries who improve market efficiency.

The Efficiency of Professional Investors on the Accruals Information

The Efficiency of Professional Investors on the Accruals Information

Earnings Persistence and Stock Market Reactions to the Different Information in Book-Tax Differences: Evidence from China

Prior studies document that book-tax differences (BTDs) reflect divergent reporting rules for book and tax purposes, and contain information about earnings management and tax planning. In this paper, we investigate whether the regulatory and opportunistic information impounded in BTDs differentially influences earnings persistence and the earnings–returns relation. Using BTD data from China, we separate BTDs into normal BTDs (NBTDs) and abnormal BTDs (ABTDs). NBTDs are more likely driven by regulatory differences between accounting and tax rules and ABTDs are more likely driven by earnings and tax management activities. We find that firms with large positive and negative ABTDs (NBTDs) exhibit less earnings persistence compared to firms with small ABTDs (NBTDs). However, the level of earnings persistence for large unsigned ABTD firms is significantly lower than it is for large unsigned NBTD firms. While large unsigned NBTDs appear to enhance the earnings–returns relation, we find no evidence that large unsigned ABTDs affect the earnings–returns relation. Overall, the results suggest that the differing components of BTDs have differential implications for earnings quality. Additional tests show that ABTDs and NBTDs can provide incremental information about earnings persistence beyond the information in discretionary accruals and total accruals, suggesting that the investigation of BTDs adds value to financial analysis.

The influence of the nature of government accounting and reporting in decision-making: evidence from Switzerland

A key objective of government accounting and reporting has been to achieve accountability and its use in that respect has been well documented, however its use for decision-making has had less coverage. This article addresses the latter issue, providing evidence from Switzerland that the accounting basis used (accrual versus cash) influences decision-making. This is the result of the effect that the different approaches have on the nature of the information used for decision-making. Switzerland was among the first western democracies to adopt accrual accounting at both state (canton) and local levels of government in the 1980s. The Swiss federal government followed in 2007. The main examples of the use of accrual information in decision-making are: the focus on self-financing of investments in order to control borrowing, as well as the fiscal policy targets of debt reduction and maintenance of capital. All three require accrual basis information. Therefore accrual basis information is key in fiscal decision-making in Switzerland.

Relevance of Discretionary Accruals in Ohlson Model: the Case of Mexico

This study applied the modified Jones´ model (1991) for selected companies of Mexico. This model aims to assess the impact of Discretionary Accrual Information (DAI) on financial reporting statements, in order to identify the value relevance of “earnings quality”. We applied methodological criteria of Chung et al (2005) and Mukit & Iskandar (2009). We analyzed financial information of the 35 stock included in the Index of Prices and Quotations (IPC) of the Mexican Stock Exchange (BMV) for the period 2000 to 2011. 19 companies met the specifications of the model, for 48 quarters of information. The analysis was done in three parts: first, an analysis of the modified Jones´ model under panel data considerations by using fixed effects and adjustments of performing autocorrelation of order 1; second, a correlation analysis between the residuals of the modified Jones´ model and the return of stock price in 3 annual closings years of study: 2007, 2008 and 2009; and third, we incorporated this variable (DAI) in the Ohlson model (of the financial and corporate accounting literature) and we tested it with panel data analysis, under fixed effects, throughout the study period.

Assessing Patient Accrual to Cooperative Group Lung Cancer Trials: Why Are Rates Disappointing?

The best way to improve survival in the lung cancer patient population is through carefully designed phase III clinical trials. Unfortunately, many phase III trials in lung cancer, including those designated priority, have failed to answer their proposed question(s) because they closed early due to poor accrual. Although trials comparing one chemotherapeutic regimen to another usually accrue well, trials that combine different therapeutic modalities (i.e., surgery versus radiotherapy) often result in poor accrual; and yet these trials pose some of the most important clinical questions. Therefore, it is important that we identify trials a priori with a high probability of successful accrual as well as identify modifiable factors that can enhance accrual in these trials. When one reviews accrual information for locally advanced non-small cell lung cancer (NSCLC) (Table 1) initiated since 1993 by the CTCGs, only one of four trials (25%) that involved all three conventional modalities (trials investigating different sequences of chemotherapy, radiotherapy, and surgery) completed accrual. This contrasts with successful accrual of four of six (66%) trials that did not involve surgery but were primarily focused on definitive radiotherapy which met their targeted accrual. In patients with early-stage NSCLC, stage IV NSCLC (Table 2), or small cell lung cancer (Table 3), patient accrual was accomplished on a consistent basis. Only 1 of 18 trials failed to achieve its accrual end point and closed early. Enhancing accrual to individual trials can involve adding resources and/or funding to implement actions that may improve accrual (opening at multiple institutions), simpli- fying eligibility criteria or omitting extra tests, or closing a poorly accruing study to release resources for others. However, the intangible element in this equation remains the scientific relevancy that a clinical trial is investigating. This is particularly germane in locally advanced NSCLC where trials may be investigating the role of different modalities in the treatment paradigm. In some sense, comparing one drug against another may be relatively easier to accomplish, but the scientific importance and potential survival impact may be less compelling. The design of a clinical trial can have several aspects that may limit accrual. A challenge that constantly faces investigator is the scientific end point and the statistical

Capitalizing research & development and ‘other information’: the incremental information content of accruals versus cash flows

This paper studies the role of the accrual process for providing value relevant information on intangibles. Expensing research & development (R&D) expenditures is, by nature, equivalent to cash accounting. Prior studies have found that accrual information has superior explanatory power for market values compared to cash flows (Dechow in J. Account. Econ. 18(1):3–42, 1994). We demonstrate, for a sample of German firms, that this also holds true for R&D accounting. By adjusting the earnings we create two samples reflecting R&D capitalization and expensing, respectively. We demonstrate that capitalizing R&D expenditures creates an additional accrual component of earnings which increases the explanatory power of earnings compared to cash flows (expensing) while internalizing ‘other information’ into the accounting system. This explains the higher value relevance of capitalized R&D compared to expensing established in prior research (Lev and Sougiannis in J. Account. Econ. 21(1):107–138, 1996).

Who, if Anyone, Reacts to Accrual Information?

We show that the vast majority of investors ignore value-relevant accruals information when it is first released, but that investors who initiate trades of at least 5,000 shares tend to transact in the proper direction. These investors trade on accruals information only when the previously-announced earnings signal is non-negative. Unconditionally, those investors initiating the smallest trades appear to respond to accruals in the wrong direction, but further investigation suggests this behavior is explained by their attraction to attention-grabbing stocks. Finally, we find that those who trade on accruals information have insufficient market power to mitigate the accruals anomaly.

Who, if anyone, reacts to accrual information?

We show that the vast majority of investors ignore value-relevant accruals information when it is first released, but that investors who initiate trades of at least 5,000 shares tend to transact in the proper direction. These investors trade on accruals information only when the previously-announced earnings signal is non-negative. Unconditionally, those investors initiating the smallest trades appear to respond to accruals in the wrong direction, but further investigation suggests this behavior is explained by their attraction to attention-grabbing stocks. Finally, we find that those who trade on accruals information have insufficient market power to mitigate the accruals anomaly.

Going, Going, Gone? The Apparent Demise of the Accruals Anomaly

Consistent with public statements made by sophisticated practitioners, we document that the hedge returns to Sloan's (Sloan, R. G. 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting Rev. 71(3) 289–315) accruals anomaly appear to have decayed in U.S. stock markets to the point that they are, on average, no longer reliably positive. We explore some potential reasons why this has happened. Our empirical analyses suggest that the anomaly's demise stems in part from an increase in the amount of capital invested by hedge funds into exploiting it, as measured by hedge fund assets under management and trading volume in extreme accrual firms. A decline in the size of the accrual mispricing signal, as measured by the magnitude of extreme decile accruals and the relative persistence of cash flows and accruals, may also play a (weaker) role. This paper was accepted by Stefan Reichelstein, accounting.

An Investigation Of Investors’ Use Of Reported Cash Flow And Accrual Information For Eight Countries

Using 1995 through 1999 data from the United States and seven other countries with different sets of national accounting standards (Canada, France, Germany, Hong Kong, Japan, Malaysia, and the United Kingdom), we test whether the cash flow component of earnings is more persistent than the accrual component, and then whether the relative persistence of these two earnings components is reflected in stock market returns. Using the Mishkin model employed by Sloan (1996) to test the data for each of the countries, we find that, while reported cash flows are significantly more persistent than accruals in each of the eight accounting regimes, Canadian companies are the only ones for which the pricing of equity securities is clearly efficient with regard to cash flow and accrual information. While there is some evidence for this stock market efficiency for the UK and German companies, it is not conclusive. For firms from France, Hong Kong, Japan, Malaysia, and the United States, the differences observed between the persistence of cash flows and accruals are not reflected in stock prices.

MIND YOUR ACCRUALS: PERCEIVED USEFULNESS OF FINANCIAL INFORMATION IN THE AUSTRALIAN PUBLIC SECTOR UNDER DIFFERENT ACCOUNTING SYSTEMS

This study examines the usefulness of three accounting systems (cash, Generally Accepted Accounting Principles (GAAP) accrual, and Government Finance Statistics (GFS) accrual) for public sector decision‐making. From a survey of internal users, external users, and preparers in Australia, we find that GAAP accrual information is perceived to be relatively more useful and understandable than the other two systems for most decisions examined. The relatively higher ratings for GAAP accrual information differ from earlier studies and may reflect an experience or familiarity effect whereby perceptions of usefulness are enhanced because respondents have become more used to the system. This effect might also explain the lower ratings for GFS accrual.

Decision Usefulness of Cash and Accrual Information: Public Sector Managers’ Perceptions

This study examines the usefulness of accrual accounting information for internal decision‐making contexts in the Western Australian public sector. Based on questionnaire responses of public sector managers, it was found that accrual accounting is perceived to be more useful than cash accounting in 16 of the 19 decision situations. These results suggest that the perceived usefulness of the accrual accounting system has improved with the passage of time. It may well be that perceptions of the usefulness of information derived from an accounting system will change over time as users gain familiarity and experience with a system.

A phase I trial of the combination of temsirolimus (TEM) and sorafenib (SOR) in advanced hepatocellular carcinoma (HCC).

TPS213 Background: The multikinase inhibitor SOR prolongs survival in patients with advanced HCC. Another pathway often active in HCC is mammalian target of rapamycin (mTOR). Preclinical studies suggest that mTOR inhibition impairs HCC tumor growth and angiogenesis. In HCC xenografts, the addition of an mTOR inhibitor to SOR enhances antitumor effect. Phase I studies of an mTOR inhibitor combined with SOR show acceptable toxicity but do not include HCC patients with liver disease. We have developed a 2-site phase I dose escalation trial of the mTOR inhibitor TEM plus SOR in patients with advanced HCC to determine safety and the maximum tolerated dose (MTD) which will be the recommended phase II dose of the combination. Pharmacokinetics (PK) of TEM and its primary metabolite will be performed in 6 patients (pts) at MTD. A future single arm, 2-stage phase II study with exploratory endpoints is planned to measure efficacy. The study was approved and funded by the National Comprehensive Cancer Network (NCCN) from general research support. Methods: Main eligibility criteria: Unresectable HCC diagnosed histologically or clinically. No prior systemic therapy (Tx). Prior resection and local Tx permitted if ≥1 untreated radiographically measurable site of disease. ECOG performance status ≤2. Child-Pugh score ≤7 points and bilirubin ≤2 mg/dL. Adequate organ and marrow function. Treatment: Starting dose level (DL 1) is TEM 15 mg IVweekly plus SOR 200 mg PO BID in 28-day cycles. Design: 3+3 dose escalation until MTD with dose-limiting toxicity (DLT) window of 28 days. 6 additional pts will be enrolled at MTD as PK cohort. Sample size for phase I: 9-30 pts. Primary endpoints: Safety and MTD. Other endpoints: PK for TEM in 6 pts at MTD. Viral load measurement in pts with viral hepatitis. Exploratory dynamic-contrast enhanced CT imaging, Choi response criteria, biomarkers (AFP, AFP-L3, and DCP), and circulating tumor cell measurements will be performed in PK cohort pts and all pts in ensuing phase II trial. Accrual information: 3 pts have enrolled to DL 1. Updated enrollment information will be provided. Dose level TEM (mg IV weekly) SOR (mg PO) −2 10 200 QD −1 15 200 QD 1 (starting dose) 15 200 BID 2 15 400 BID 3 25 400 BID 4 25 200 BID Author Disclosure Employment or Leadership Position Consultant or Advisory Role Stock Ownership Honoraria Research Funding Expert Testimony Other Remuneration Bayer-Onyx National Comprehensive Cancer Network

Dissemination of Accruals Information, Role of Semi‐Annual Reporting, and Analysts' Earnings Forecasts: Evidence from Japan

AbstractOur study investigates the effects of dissemination of accounting accruals information on stock prices using Japanese annual reports as our sample. We conduct month‐by‐month detailed analyses of price adjustment behavior with a particular focus on revisions of analysts' earnings forecasts and changes in trading volume around the period of upcoming semi‐annual reports. We find that analysts' forecasts are often revised around this time, and analysts use this as auxiliary information. In addition, an accompanying re‐adjustment of abnormal returns and an increase in trading volume are observed. Our findings demonstrate that informational uncertainty initially triggered by the announcement of annual reports decreases as semi‐annual reports are disclosed and analysts change their earnings forecasts, and confirms the importance of semi‐annual reporting.

Do management earnings forecasts incorporate information in accruals?

I investigate whether management earnings forecasts fully reflect the implications of accruals for future earnings. I find that managers overestimate accrual persistence in range forecasts but not in point forecasts and that managers’ accrual-related forecast bias in range forecasts increases with forecast range and forecast horizon. My results suggest that managers overestimate accrual persistence when faced with greater difficulty forecasting earnings. Moreover, I find that managers’ accrual-related forecast bias in range forecasts is somewhat affected by managerial opportunism and fear of litigation. Finally, I find accrual mispricing for firms issuing range forecasts but not for firms issuing point forecasts.

Do accruals exacerbate information asymmetry in the market?

Abstract A considerable body of evidence, both archival and experimental, suggests that accounting accruals are heterogeneously interpreted by investors. We examine whether the information asymmetry among investors arising from this heterogeneous interpretation, implied in these empirical results, affects transactions costs in the form of the adverse selection component of the bid–ask spread. We examine this impact both, in a yearly setting and around the first release of quarterly accrual information. The results of the study provide empirical evidence of a positive association between the adverse selection component and accruals in the yearly analysis. Since wider bid–ask spreads are both theoretically and empirically linked to higher stock returns (Brennan & Subrahmanyam, 1996), our results provide a transaction cost basis for understanding one possible factor underlying the linkage between accruals and cost of equity capital, and accruals and information risk pricing as documented in Francis et al. (2005) and Ecker et al. (2006).