Cash Flow and Accrual Surprises: Persistence and Return Implications

This paper investigates the return implications of the cash flows and accruals components of unexpected earnings. We find that unexpected cash flows have greater persistence than unexpected accruals and that this difference is driven primarily by loss firms. We also find that markets appear to react more (less) strongly to the unexpected cash flow (accrual) component of total unexpected earnings, but that only firms that beat both earnings expectations and cash flow expectations are rewarded with higher returns. These results are consistent with at least some fixation on the total earnings number, to the exclusion of more economically important cash flow surprises.