Can Conservatism Affect the Accruals Anomaly?
Kent State University
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 inefficiencyworking papers series
Date posted: January 16, 2012 ; Last revised: January 16, 2014
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