Company earnings have always been prone to sudden spikes and swoons. That's why it's a bad idea for stock investors to rely too heavily on value signals the price-to-earnings ratios.
Some changes to earnings, however, are less surprising than others. In the mid-1990s, an accounting professor named Richard Sloan uncovered something called the accrual anomaly. "Anomaly" is a word researchers have long used to describe clues that predict stock returns, on the belief that in an efficient market, such clues aren't supposed to exist. "Accrual" is an accounting term that's central to how earnings are calculated.
Earnings are sometimes thought of as the money a company has left each quarter after the bills are paid, but that's not quite accurate. Earnings are a bookkeeping construct that shows how much cash a company would generate if its costs lined up neatly with its expenses each quarter (say, if it didn't have to pay $100 million all at once for a factory that will produce revenues for decades, and if the $3 million it paid for raw materials one quarter were sold as finished goods in the same quarter instead of a later one). In other words, earnings are profits that have accrued but haven't necessarily been pocketed. (more)
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