Abnormal Accrual-Based Anomaly and Managers' Motivations to Record Abnormal Accruals

Abstract:     
Prior research (e.g., Xie 2001) documents that future stock returns are negatively correlated with abnormal accruals (referred to as the abnormal accrual-based anomaly), but the underlying reason is not clear. In this paper, we investigate the impacts of managers' motivations to record abnormal accruals on this anomaly. We hypothesize and find that the abnormal accrual-based anomaly is systematically associated with managers' motivations to record abnormal accruals. Future returns are negatively (positively) associated with abnormal accruals recorded for opportunistic earnings management (performance/signaling) purposes. These results suggest that investors' failure to detect managers' motivations to record abnormal accruals provides a potential explanation for the abnormal accrual-based anomaly. This failure provides managers with an opportunity to engage in opportunistic earnings management, and thus hinders managers' ability to communicate private information to the stock market via abnormal accruals.

Number of Pages in PDF File: 27

Keywords: abnormal accruals, managers' motivations, market efficiency, operating cash flows

JEL Classification: M41, M43, G14

working papers series