Quarterly accruals or cash flows in portfolio construction?

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.