Daily Speculations

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Art Cooper: Accounting accruals vs. actual earnings and stock returns

Following up on the Spec Duo's MSN column re taxes paid as being a reliable indicator of corporate profits (as opposed to accounting earnings, which are often misleading), p 13 of Monday's Barron's notes research by Wharton accounting professors Scott Richardson, Christian Leuz and David Larcker, which found that the stock of companies with unusually high accounting accruals tend to underperform.  "[T]he accounting methods used to produce earnings ultimately led to restatements that wound up hurting stock prices."  I'm sure you folks can access this research much more readily than I.

Criterion Research Group, a NY research boutique, is set to offer a service that predicts earnings performance, based on each company's use of accruals.  "We've documented a direct correlation between high accrual scores, poor earnings growth and disappointing stock returns" said Neil Baron, Criterion's founder.  Among the larger caps making extensive use of accruals are Wyeth, Bristol-Meyers, Ford, Forest Labs, Ingersoll-Rand, Halliburton, Marriott Int'l, Lucent and Concord EFS.


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