Informativeness of Earnings to Returns Conditional on the Relative Levels of the Accrual Ratio and Discretionary Accruals

Document Type



accrual ratio; discretionary accruals; earnings quality; returns; informativeness

Identifier Data


Journal of Theoretical Accounting Research

Publication Source

Journal of Theoretical Accounting Research


I evaluate how earnings and its accrual and cash flow components are informative to returns conditional on the Modified Jones Model (Dechow et al. 1995) discretionary accruals and the accrual ratio (a relatively simpler measure). Consistent with prior research (e.g. Sloan 1996), cash flows are more informative to returns than both earnings and the accruals component of earnings. While the difference in returns of the extreme deciles of Discretionary Accruals are not very large, those of the Accrual Ratio are much larger, suggesting that the Accrual Ratio can be a simple but effective, complementary gauge of earnings quality to Discretionary Accruals