The Number of Estimates in Footnotes and Accruals

This study examines whether the number of estimates in the qualitative portions of a firm's Notes to the Financial Statements (hereafter footnotes) is informative about the relation between accruals and future earnings. We measure the number of estimates using the frequency of the use of the word estimate in the footnotes. Motivated by the arguments in Sloan (1996) and Richardson et al. (2005), we find that the accruals of firms that have more estimates have a lower relation with future earnings (i.e., lower persistence) and a lower association with their past, current, and future cash flows, in the spirit of Dechow and Dichev (2002). We further document that the likelihood of meeting or beating analysts' consensus earnings forecasts increases with the number of estimates. Lastly, we do not find evidence of a relation between the number of estimates and the accrual anomaly