Do analysts understand accruals’ persistence? Evidence revisited

We revisit the question of whether analysts anticipate accruals’ predicted reversals (or persistence) of future earnings. Prior evidence shows that analysts are over optimistic with respect to working capital (WC) accruals which is interpreted as their inability to understand accruals’ persistence. Using total accruals (TACC) that in addition to WC accruals cover non-current operating and financing accruals, we show that analysts’ forecast errors are uncorrelated with accruals. We show that analysts’ optimism with respect to accruals is due to the use of an incomplete accrual measure, which does not necessarily indicate analysts’ lack of sophistication. Our results imply that traditional accrual definition should be revised in future studies. The main implication of our finding is that analysts seem to exhibit the necessary sophistication in understanding accruals persistence contrary to suggestions in prior research. Our findings are in line with the idea that any anomalous stock price behaviour related to accruals is not due to analysts’ forecasts, i.e., analysts' earnings forecasts and recommendations should not be considered as the originating source of stock price underreaction or overreaction with respect to accruals.