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The effect of timely loss recognition on the predictive ability of accrual components with respect to future cash flows
Journal article   Peer reviewed

The effect of timely loss recognition on the predictive ability of accrual components with respect to future cash flows

Wei Chen, Daniel W. Collins, Sam Melessa and Bing Chen
Advances in accounting, Vol.71, 100883
12/2026
DOI: 10.1016/j.adiac.2026.100883

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Abstract

In this paper, we examine a mechanism through which timely loss recognition delivers contracting benefits to debtholders: whether timely loss recognition enhances the ability of accruals to predict future cash flows in bad-news periods. Using industry-leverage groups that differ in the degree of timely loss recognition and in the predictive ability of accruals, we find a positive association between timely loss recognition and the ability of accrual components to predict future cash flows in bad news periods. Moreover, we find the effect is concentrated in income-reducing asset accruals that are more likely to reflect timely loss recognition (e.g., impairments and write-downs) than are liability accruals. We conduct additional analyses to strengthen the validity of our results. Our study provides evidence that timely loss recognition effectively alerts contracting parties to future declines in cash flows in bad news periods. This finding sheds light on how timely loss recognition facilitates contracting efficiency and advances the understanding of the debt contracting benefits of timely loss recognition claimed in prior literature.
 Accruals Cash flow predictability Conditional conservatism Timely loss recognition

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