Understanding the Accrual Anomaly
Jin (Ginger) Wu
University of Georgia - Department of Banking and Finance
Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)
Yale School of Management
Ross School of Business Paper No. 1100
Interpreting accruals as working capital investment, we hypothesize that firms rationally adjust their capital investment to respond to discount rate changes. Consistent with the discount-rate hypothesis, we document that (i) the predictive power of accruals for future returns increases with the correlations of accruals with past and current stock returns;(ii) controlling for investment substantially reduces the magnitude of the accrual anomaly; (iii) the ex-ante expected returns of various accrual strategies have been stable at around 5% per annum over the past 35 years; (iv) the accounting reliability of various accrual components is inversely related to their cross-correlations with investment-to-assets; and finally (v) high accrual firms have similar corporate governance and entrenchment indexes as low accrual firms, suggesting that the accrual anomaly is unlikely to be driven by investor overreaction to over-investment.
Number of Pages in PDF File: 49
Keywords: The accruals anomaly, total accruals, discretionary accruals, net operating assets, investment-based asset pricing, capital investment, time-varying expected returns
JEL Classification: G12, G14, G31, G34, M41
Date posted: March 25, 2008 ; Last revised: September 16, 2009
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