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Accrual and Cash Flow Comparability: Evidence from Stock Analysts and Credit Rating Agencies

Park, Duri
http://rave.ohiolink.edu/etdc/view?acc_num=osu1385895448

Abstract Details

2013, Doctor of Philosophy, Ohio State University, Accounting and MIS.
Prior studies suggest that higher comparability of financial reporting leads to reduced information processing costs for external market participants. However, comparability of firms can arise from two distinct sources: (1) similarities in accounting systems and (2) similarities in the underlying business operations. By decomposing earnings comparability (De Franco, Kothari, and Verdi 2011) into accrual-related and cash flow-related factors, I examine how two different types of comparability affect the information processing costs borne by different information intermediaries in the financial market. I show that the positive relation between earnings comparability and analysts’ peer firm coverage documented in De Franco et al. (2011) is mainly driven by comparability in cash flows, consistent with the notion that firms’ similarities in underlying operations play an important role in analysts’ coverage decisions. Further analysis reveals that both accrual and cash flow comparability significantly affect analysts’ forecast accuracy and dispersions. These results extend the work of De Franco et al. (2011) by demonstrating that comparability inherent in firms’ operations significantly affects the information processing costs of stock analysts. I also find some evidence that credit rating agencies make more timely downgrades before default for firms with higher cash flow comparability. In contrast to stock analysts, however, accrual comparability seems to play a less influential role for the timeliness of credit rating agencies’ downgrade decisions. This is consistent with rating agencies placing more weight on firms’ underlying operations (cash flows) relative to accounting numbers (accruals) in assessing default risk. My findings highlight the importance of distinguishing different types of comparability and suggest that comparability may have different implications for financial information users, depending on their roles in the market.
Darren Roulstone (Advisor)
Anil Arya (Committee Member)
Anne Beatty (Committee Member)
Andrew Van Buskirk (Committee Member)
68 p.
Accounting
Comparability; earnings; accruals; cash flows; stock analyst; credit rating agency

Recommended Citations

Citations

  • Park, D. (2013). Accrual and Cash Flow Comparability: Evidence from Stock Analysts and Credit Rating Agencies [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1385895448

    APA Style (7th edition)

  • Park, Duri. Accrual and Cash Flow Comparability: Evidence from Stock Analysts and Credit Rating Agencies. 2013. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1385895448.

    MLA Style (8th edition)

  • Park, Duri. "Accrual and Cash Flow Comparability: Evidence from Stock Analysts and Credit Rating Agencies." Doctoral dissertation, Ohio State University, 2013. http://rave.ohiolink.edu/etdc/view?acc_num=osu1385895448

    Chicago Manual of Style (17th edition)

osu1385895448
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© 2013, all rights reserved.
This open access ETD is published by The Ohio State University and OhioLINK.