Prof. Sloan Receives Top Accounting Award

The American Accounting Association (AAA) 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.

“I was surprised, delighted and honored to receive the award. While I like the paper, it has stirred up a fair bit of controversy and took a long time to publish, so the award provides welcome positive recognition from our peers,” says Sloan, the L.H. Penney Professor of Accounting and former managing director of equity research at Barclays Global Investors. He joined the Haas Accounting Group in March.

The paper, co-authored with Scott Richardson, Irem Tuna, and Mark Soliman, former PhD students of Sloan’s at the University of Michigan, 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. By using accruals rather than just cash accounting, companies aim to provide investors with more relevant information about periodic financial performance.

The scandals behind companies such as Enron, WorldCom, and Lehman Brothers illustrated the need for increased scrutiny of accounting practices. 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.

The AAA screening committee considered nominations published between 2004 and 2008. The criteria included uniqueness and potential magnitude of contribution to accounting education, practice and/or future accounting research; breadth of potential interest; originality and innovative content.

Professor Sloan will receive the award in August at the AAA’s annual meeting in New York.