Predicting Stock Market Returns with Aggregate Discretionary Accruals
Florida International University (FIU) - Department of Finance
University of Hong Kong - School of Economics and Finance; Peking University - Guang Hua School of Management
St. John's University
January 8, 2010
Journal of Accounting Research, Forthcoming
We find that the positive relation between aggregate accruals and one-year-ahead market returns documented in Hirshleifer, Hou and Teoh  is driven by discretionary accruals but not normal accruals. The return forecasting power of aggregate discretionary accruals is robust to choices of sample periods, return measurements, estimation methods, business condition and risk premium proxies, and accrual models used to isolate discretionary accruals. Our extensive analysis shows that aggregate discretionary accruals, in sharp contrast to aggregate normal accruals, contain little information about overall business conditions or aggregate cash flows and display little co-movement with ICAPM-motivated risk premium proxies. Our findings imply that aggregate discretionary accruals likely reflect aggregate fluctuations in earnings management, thereby favoring the behavioral explanation that managers time aggregate equity markets to report earnings.
Number of Pages in PDF File: 52
Keywords: Aggregate Discretionary Accruals, Return Predictive Regressions, ICAPM-Motivated Risk Premium Proxies, Managerial Market Timing
JEL Classification: G10, M40Accepted Paper Series
Date posted: March 9, 2010
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