Accrual Reversals and Company Performance: Analysis of Emerging Market

  • Muhammad Saad Baloch Department of Management Sciences, COMSATS Institute of Information & Technology, 45550, Islamabad, Pakistan
  • Arshad Hassan Department of Management and Social Sciences, Faculty of Management and Social Sciences, Capital University of Science and Technology, 45550, Islamabad, Pakistan


This is a pioneering study on total accrual reversals, i.e. long-term reversals and their role in company performance in an emerging market. This study observes the impact of total accrual reversals on company performance more exclusively. The sample consists of 100 non-financial companies listed on the Pakistan Stock Exchange (PSE). The purpose is to examine the role of long-term reversals in the performance of companies by observing the impact of total accrual reversals for the current period as well as the previous period on the earnings as it is used as a proxy for company performance. The Pooled OLS Robust method with Driscoll-Kraay standard errors is used. The result indicates that total accrual reversals of the previous and current period affect the earnings of companies positively. This result rejects the perception that accrual reversal does not predict the earnings in the long-term perspective. The study concludes that the role of reversals of total accruals in the performance of companies is positive, which is beneficial for growing companies in an emerging market. Hence, companies should increase the total accrual reversals to enhance their performance and attract foreign investors.

Keywords: Accrual Reversals, Earnings, Emerging market, Pakistan Stock Exchange
JEL Classification: M40, M41


Allen, E. J., Larson, C. R., & Sloan, R. G. (2013). Accrual reversals, earnings and stock returns. Journal of Accounting and Economics, 56(1), 113-129.
Baber, W. R., Kang, S. H., & Li, Y. (2011). Modeling discretionary accrual reversal and the balance sheet as an earnings management constraint. Accounting Review, 86(4), 1189-1212.
Baloch, M. S. (2015). Does the accrual anomaly exists in stock market? Evidence from Pakistan. European Journal of Accounting, Finance and Business, 3(3), 44-71.
Boubakri, F. (2012). The Relationship between Accruals Quality, Earnings Persistence and Accruals Anomaly in the Canadian Context. International Journal of Economics and Finance, 4(6), 51.
Brochet, F., Nam, S., & Ronen, J. (2008). The role of accruals in predicting future cash flows and stock returns. Available at SSRN 1126022
Dechow, P. M. (1994). Accounting earnings and cash flows as measures of Company performance: The role of accounting accruals. Journal of Accounting and Economics, 18(1), 3-42.
DeFond, M. L., & Park, C. W. (2001). The reversal of abnormal accruals and the market valuation of earnings surprises. Accounting Review, 76(3), 375-404.
Driscoll, J. C., & Kraay, A. C. (1998). Consistent covariance matrix estimation with spatially dependent panel data. Review of Economics and Statistics, 80(4), 549-560.
Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7(1-3), 85-107.
Hirshleifer, D., Hou, K., & Teoh, S. H. (2009). Accruals, cash flows, and aggregate stock returns. Journal of Financial Economics, 91(3), 389-406.
Hribar, P., & Collins, D. W. (2002). Errors in estimating accruals: Implications for empirical research. Journal of Accounting research, 40(1), 105-134.
Jeter, D. C., & Shivakumar, L. (1999). Cross-sectional estimation of abnormal accruals using quarterly and annual data: Effectiveness in detecting event-specific earnings management. Accounting and Business Research, 29(4), 299-319.
Lewellen, J., & Resutek, R. J. (2014). Why do accruals predict earnings? Tuck at Dartmouth, Working paper.
Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? (Digest summary). Accounting review, 71(3), 289-315.
Teoh, S. H., Wong, T. J., & Rao, G. R. (1998). Are accruals during initial public offerings opportunistic? Review of Accounting Studies, 3(1), 175-208.
How to Cite
BALOCH, Muhammad Saad; HASSAN, Arshad. Accrual Reversals and Company Performance: Analysis of Emerging Market. Asian Journal of Accounting Perspectives, [S.l.], p. 55-66, dec. 2016. ISSN 0128-0384. Available at: <>. Date accessed: 20 oct. 2017.