The Relationship between Accruals Quality, Earnings Persistence and Accruals Anomaly in the Canadian Context

Abstract

The aim of this paper is twofold. First, we examine whether accruals’ low reliability explains bias in earnings persistence coefficient. Second, we test whether investors overestimate persistence of low reliability components of accruals. To test our hypotheses, we use a sample of Canadian firms listed on the Toronto Stock Exchange for the period 2002- 2005. The results show that: (1) low reliability of some accruals components seems to partially explain bias in earnings persistence coefficient; (2) not only do Canadian investors overestimate low reliability components of accruals, but also some high reliability components.