5. Analyst 1: Earnings that have a significant accrual component are less persistent.
Analyst 2: Low-quality earnings are insufficient to cover the company’s cost of capital
and/or are derived from nonrecurring, one-off activities.
A. Analyst 1 is correct.
B. Analyst 2 is correct.
C. Both analysts are correct.
LO.g: Explain mean reversion in earnings and how the accruals component of earnings
affects the speed of mean reversion.
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