Synopsis: This paper shows that the accrual component of earnings is less persistent than the cash flow component of earnings, but that this difference is not reflected in stock prices. An investment strategy that goes long in low accrual firms and short in high accruals firms yields annual hedge portfolio returns in excess of 10%. High (low) accruals are indicative of aggressive (conservative) accounting, and so this paper documents significant returns to a very basic earnings quality strategy. In hindsight, the definition of accruals used in this paper (primarily working capital accruals) is incomplete. [see Richardson, Sloan, Soliman and Tuna (2002)].

Synopsis: This paper provides a small improvement to the trading strategy in Sloan (1996). The paper basically demonstrates the results documented in Sloan are driven by abnormal accruals. Abnormal are accruals are derived by orthogonalizing Sloan's original measure of accruals with respect to sales growth. This procedure removes 'normal' accruals that are driven by growth in operating activity. The remaining abnormal accruals are more likely to reflect transitory accounting distortions. Accordingly, the paper shows that the lower earnings persistence and the returns to the accrual trading strategy are driven by abnormal accruals. However, since most of the variation in accruals is assigned to abnormal accruals, the returns to the trading strategy based on abnormal accruals are of about the same magnitude as the returns using Sloan's original accrual trading strategy

Synopsis: This paper shows that conservative accounting interacts with changes in investment to produce temporary distortions in earnings. The paper also shows that stock prices act as if investors do not anticipate the temporary nature of these distortions. In essence, the paper shows that firms with extreme changes in their LIFO reserves, R&D expenditures and advertising expenditures have temporary distortions in their earnings. A trading strategy of going long in firms with unusually high changes in these variables and short in firms with unusually low changes in these variables produces annual hedge portfolio returns of about 9%