Accruals and Conditional Equity Premium
University of Cincinnati - Department of Finance - Real Estate
Wayne State University - School of Business Administration
January 22, 2010
Journal of Accounting Research, Forthcoming
Accruals correlate closely with the determinants of conditional equity premium at both the firm and the aggregate levels. The common component of firm-level accruals, which cannot be diversified away by aggregation, explains the positive relation between aggregate accruals and future stock market returns (Hirshleifer, Hou, and Teoh ). The residual component, which accounts for most variation in firm-level accruals, is responsible for the negative cross-sectional relation between firm-level accruals and future stock returns (Sloan ). Consistent with the risk-based explanation, aggregate accruals, as a proxy for conditional equity premium, forecast changes in aggregate economic activity. Moreover, we document a similar co-movement of earnings with conditional equity premium at both the firm and the aggregate levels, which helps explain the negative relation between changes in aggregate earnings and contemporaneous market returns (Kothari, Lewellen, and Warner ).
Number of Pages in PDF File: 45
Keywords: Accruals, Earnings, Stock Return Predictability, Market Efficiency
JEL Classification: G1Accepted Paper Series
Date posted: January 24, 2010 ; Last revised: October 19, 2010
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.453 seconds