Using quarterly and rolling four-quarter data, this study explores the
incremental roles of accruals and net operating cash flows in generating
abnormal returns for the full population of U.S. listed companies and specific
industries. Quarterly net operating cash flow (OCF) is a stronger signal of the
next quarter’s returns than are accruals. When rolling four-quarter OCF
and accruals were used to construct portfolios held for a whole year, however,
OCF dominated accruals only in the first three fiscal quarters. The
industry-specific results are consistent with the results for the full
population. For most industries, investment managers and financial analysts
should focus on OCF more than on accruals.