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Sloan Awarded Top Accounting Honor
The American Accounting Association has selected Professor Richard Sloan to receive its most prestigious annual award, the Notable Contributions to Accounting Literature Award, for his 2005 paper examining accruals, earnings, and stock prices.
The paper, titled “Accrual reliability, earnings persistence and stock prices,” was published in the Journal of Accounting and Economics.
Co-authored with two former PhD students of Sloan’s at the University of Michigan, the paper showed that firms whose earnings are boosted by accounting estimates reported future earnings declines and suffered corresponding stock price declines. The results suggest that the stock market is temporarily fooled by aggressive accounting practices and that there are significant costs associated with incorporating less reliable accrual information in financial statements.
Accruals represent accountants’ estimates of future benefits on a company’s balance sheet, including receivables, inventory, and investments.
Sloan says the measures developed in the paper are now widely used by investors to avoid investing in firms with unreliable books, and consequently temporarily inflated earnings and stock prices.