We test whether investment explains the accrual anomaly by distinguishing between accruals related to new investment and so-called ‘nontransaction' accruals, items such as depreciation and asset write-downs that do not represent new investment expenditures. The two types of accruals have very...

Higher accruals are associated with lower subsequent earnings. We show this phenomenon can be explained by the way sales, profits, and working capital respond to changes in a firm's product markets. Empirically, high accruals predict high subsequent sales growth but a long-lasting drop in both...