Earnings Prediction and the Role of Accural‐Related Disclosure: International Evidence

Accounting accruals are at the heart of most accounting systems. A basic premise of accrual accounting is that it provides a more timely and relevant performance measure than cash flows through a better matching of revenues and expenses. While some prior studies suggest that managers use individual accrual‐related disclosure items in an opportunistic manner, hindering market participants’ ability to predict future firm performance, the market’s expectation about future firm performance will become more accurate and consistent under accrual accounting if the market properly uses such information to set expectations about future firm performance. Consistent with this idea, our evidence shows that the frequency of accrual‐related disclosure is positively (negatively) associated with analysts’ forecast accuracy (dispersion). We interpret this finding as the presence of more detailed accrual‐related disclosure requirements enhancing the market participants’ ability to predict earnings.