Earnings Management and Earnings Surprises: Stock Price Reactions to Earnings Components*

We examine the stock price reactions to earnings announcements. We use a database that contains analysts ' forecasts of earnings and revenues. This allows us to decompose earnings surprises into three components: innovations to expected cash flow and expected normal accruals, and an abnormal accrual component. We find that abnormal stock returns are contemporaneously positively related to all three components of the earnings surprise. The impact on stock prices varies, however, across the components. The marginal value of innovations to expected normal accruals much exceeds the marginal value of innovations to expected cash flow, which exceeds the marginal value of abnormal accruals. We also examine the relation between the earnings components and future cash flow and stock returns. Innovations to the earnings components are positively related to future cash flow