Journal of Accounting and Management Information Systems (JAMIS)

The role of earnings and its constituents in measuring firm performance. A survey of some key empirical studies’ results

Supp/2006 ,   p665..670


Keywords:   accruals, cash flows, earnings, financial statement analysis, growth, earnings persistence.

The relationship between accounting earnings and its constituents and stock prices has been the subject of numerous empirical studies, within the specialists investigated the value relevance and reliability of reported earnings and cash flows to investors in the investment decision-making process. The aim of this paper is to examine the main results of the key empirical studies on this topic. Our review centers on two streams of literature, the first one documenting that the less reliable categories of accruals lead to lower earnings persistence and that investors do not fully anticipate the lower earnings persistence, leading to significant security mispricing. A second stream of literature argues that this result is attributable to a more general growth effect and that growth-related factors, such as conservative accounting on new investments, explain the lower persistence of accruals. This paper reviews and summarizes the main results related to each of this stream of literature. It also presents some accruals’ definition and categorization issues.