Review of Accounting Studies

, Volume 21, Issue 4, pp 1046–1080 | Cite as

The predictive power of investment and accruals

  • Jonathan Lewellen
  • Robert J. Resutek


We test whether investment explains the accrual anomaly by splitting total accruals into investment-related and “nontransaction” accruals, items such as depreciation and asset write-downs that do not represent new investment expenditures. The two types of accruals have very different predictive power for firm performance, not just for future earnings but also for future cash flow and stock returns. Most importantly, nontransaction accruals have the strongest negative predictive slopes for earnings and stock returns, contrary to the predictions of the investment hypothesis. A long-short portfolio based on nontransaction accruals has a significant average return of 0.71 % monthly from 1972 to 2010 and remains profitable at the end of the sample when returns on other accrual strategies decline. Our results suggest that nontransaction accruals are the least reliable component of accruals and show that a significant portion of the accrual anomaly cannot be explained by investment.


Earnings persistence Accruals Investment Stock returns Anomalies 

JEL Classification

G14 M41 



We are grateful to Asher Curtis, Amy Hutton, Mozaffar Khan, Chad Larson, Joshua Livnat, John McInnis, Scott Richardson, Richard Sansing, Phillip Stocken, two anonymous referees, and workshop participants at the 2012 AAA Annual Meeting for helpful comments and suggestions.


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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Tuck School of BusinessDartmouth CollegeHanoverUSA
  2. 2.J.M. Tull School of AccountingUniversity of GeorgiaAthensUSA

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