March 26, 2017

Prof. Richard Sloan Honored with Top Accounting Award

Prof. Richard Sloan
Prof. Richard Sloan

By Pamela Tom

Prof. Richard Sloan received the American Accounting Association’s “Seminal Contributions to Accounting Literature” Award on Aug. 8 for a paper that changed the way many investors and investment managers build portfolios.

The paper, “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?” (The Accounting Review, July 1996), includes Sloan’s discovery of “the accrual anomaly.” Detecting this anomaly revealed how much accounting estimates influence the quality of a company’s reported earnings and showed how those estimates can temporarily distort stock prices.

In announcing the award, the American Accounting Association said Sloan’s work has “stood the test of time” and contributed in a fundamental way to later research.

Sloan, the Emile R. Niemela Chair in Accounting and International Business, said that before he wrote the paper, the conventional wisdom was that investors are savvy and can tell which companies are making aggressive or conservative estimates.  

Sloan found this assessment to be false. Studying financial reports, Sloan zeroed in on the companies with the largest and smallest earnings estimates. He found that stock prices of companies using the highest estimates to determine their earnings were most likely to decrease. Companies with the lowest estimates saw an increase in earnings.

The failure to previously recognize the anomaly meant that investors had lost a great opportunity to make more money. In 2004, Businessweek/Bloomberg wrote about the impact of Sloan’s work, calling him “the market scholar.”

Sloan’s findings, though published 20 years ago, remain relevant today. Today, versions of Sloan’s original accrual formula are featured in commercial equity risk models and ‘smart beta’ investment products.

 

 

Topics:    Research News