Reference no: EM132867660

Question - IMPORTANCE: Undertaking research can help a company avoid future failure. Carrying out research can also help a business determine whether now is the right time to expand into another town or whether it needs to apply for a new loan. It may also help a small business decide if a process should be altered or if more needs to be done to meet the requirements of the customer base.

TITLE: Accrued Earnings and Growth: Implications for Future Profitability and Market Mispricing by Patricia M. Fairfield ; J. Scott Whisenant ; Teri Lombardi Yohn

ARTICLE: Prior research reveals that the accrual component of profitability is less persistent than the cash flow component, and that investors fail to fully appreciate their differing implications for future profitability (Sloan 1996). However, accruals are a component of growth in net operating assets as well as a component of profitability. Just as we can disaggregate profitability into accruals and cash flows from operations, we can disaggregate growth in net operating assets into accruals and growth in long-term net operating assets. We find that, after controlling for current profitability, both components of growth in net operating assets-accruals and growth in long-term net operating assets-have equivalent negative associations with one-year-ahead return on assets. This result is consistent with conservative accounting and diminishing marginal returns on investments. We also find that, after controlling for current profitability, the market appears to equivalently overvalue accruals and growth in long-term net operating assets relative to their association with one-year-ahead ROA. Our evidence suggests that the accrual anomaly documented in Sloan (1996) is a special case of what could be viewed as a more general growth anomaly.

What are contribution of this study in the accounting field? Relate it in the importance.