Accruals, Capital Investments, and Stock Returns
K. C. John Wei
Hong Kong University of Science & Technology (HKUST) - Department of Finance
University of Texas at El Paso - College of Business Administration - Department of Economics and Finance
September, 23 2008
Financial Analysts Journal, Vol. 64, No. 5, 2008
The evidence from this study shows that the "accruals anomaly" and the "capital investment anomaly" are distinct, even though capital investments and accruals may be related in a certain way. The results also indicate that, after adjustment for the Fama-French three risk factors, investors earn substantially higher returns by using a strategy that exploits both anomalies at the same time than by exploiting either anomaly alone. Using current accruals as the measure of accruals produced similar results to using total accruals, and the results are robust to various measures of return. The evidence suggests that managers in companies ranked highest in both accruals and capital investments may be overly optimistic about future demand for their products.
Keywords: Equity Investments, Research Sources, Financial Statement Analysis, Accounting and Financial Reporting Issues, Portfolio Management, Equity Strategies, Equity Investments, Fundamental Analysis and Valuation ModelsAccepted Paper Series
Date posted: September 24, 2008
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