The present study examines the role of disclosure in assisting market participants to form expectations of future earnings from the accrual (i.e., the non cash) content of reported earnings. Prior research has shown that, in general, disclosure is able to enhance future earnings information in current stock returns.

In this paper, it is shown that the role of disclosure in revealing relevant information on the prospects of the firm depends on the nature of the accruals appearing in the financial statements. In this respect, therefore, the present study addresses a significant gap in the understanding of accruals by providing an insight into the strength of the interaction between reported accounting numbers and further information disclosed by the firm, and this is done in an international context relevant to the contemporary setting of integrating capital markets.

In examining whether the information about future earnings in current returns is conditional upon disclosure, it is acknowledged that accrual-based financial statements and other disclosed material may interact in conveying useful information about the future cash flows that outside investors require for valuation. Prior evidence demonstrates how investors condition their investment decisions upon disclosure together with consideration of the accounting policies that govern the calculation of accounting results. Instead of accounting policies per se, the present study focuses on the underlying nature of accrual accounting and the complementary role of disclosure in revealing the relevance of accruals for the prediction of future earnings and cash flows. The present study contributes by providing empirical evidence on the interplay between disclosure levels and accruals, in so far as it may assist market participants to become informed about future earnings, emphasising:

- the sign of accruals, i.e. whether operating asset changes and operating liability changes together result in an increase in net operating assets (a net positive accrual) or a decrease in net operating assets (a net negative accrual), and

- the duration of accruals, considering that current accruals address matching and timing issues more promptly than non-current accruals.