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Basic Question 1 of 10
Company A and B are identical, except that Company A has a larger accrual component in its earnings. Which company will have a quicker mean reversion?
B. B
C. Mean reversion will occur at a similar speed for both companies.
A. A
B. B
C. Mean reversion will occur at a similar speed for both companies.
User Contributed Comments 2
| User | Comment |
|---|---|
| connor15 | if accrual are low, this means that you have high confidence in the accounting calculation of the Net income. if you are confident with your Net Income and they are very high, they are more likely to stay high than if you have high accrual (less confidence in you Net Income calculation) and they are very high. example : LIFO liquidation will give you high Net income with High accrual (less confidence), Since NI are anormaly high because of LIFO liquidation, they will mean revert much faster to the normal level than if those net income was very high because of new sales (which give you lower accruals) |
| charliedba | High accruals are low quality earnings and not sustainable then they will mean revert faster while low accuals are higher quality and are not forced to mean revert as fast. |
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Learning Outcome Statements
describe the concept of sustainable (persistent) earnings;
describe indicators of earnings quality;
explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion;
CFA® 2024 Level II Curriculum, Volume 2, Module 15.