Can Conservatism Affect the Accruals Anomaly?

Pervaiz Alam

Kent State University

Gulraze Wakil

Carleton University - Eric Sprott School of Business

June 1, 2013

CAAA Annual Conference 2012

This paper investigates accounting conservatism’s effects on accrual persistence in predicting future earnings, and in turn, the accruals anomaly. We posit that conservatism’s asymmetric reliability and verifiability requirements for accruals will affect high accrual firms more than low accrual firms. As predicted, we find that greater conservatism increases accrual persistence more in high accrual firms. Similarly, conservatism increases the effects of accruals on future returns more for high accrual firms. Further, the portfolio level results show that the abnormal returns from the accruals anomaly can be mitigated by increased conservatism, potentially increasing market efficiency. Our results will be of interest to investors and standard setters since markets do not fully capture how accounting conservatism relates to accruals and collectively our paper finds accounting conservatism to be a positive attribute for financial reporting and its users.

Number of Pages in PDF File: 39

Keywords: accruals anomaly, accounting conservatism, market inefficiency

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Date posted: January 16, 2012 ; Last revised: January 16, 2014

Suggested Citation

Alam, Pervaiz and Wakil, Gulraze, Can Conservatism Affect the Accruals Anomaly? (June 1, 2013). CAAA Annual Conference 2012. Available at SSRN: http://ssrn.com/abstract=1985743 or http://dx.doi.org/10.2139/ssrn.1985743

Contact Information

Pervaiz Alam
Kent State University ( email )
P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1121 (Phone)
330-672-2548 (Fax)
Gulraze Wakil (Contact Author)
Carleton University - Eric Sprott School of Business ( email )
1125 Colonel By Drive
Ottawa, Ontario K1S SB6
613-520-2600 (Phone)
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