Is Accruals Quality a Priced Risk Factor?
John E. Core
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Wayne R. Guay
University of Pennsylvania - Accounting Department
Rodrigo S. Verdi
Massachusetts Institute of Technology (MIT)
December 13, 2007
In a recent and influential empirical paper, Francis, LaFond, Olsson, and Schipper (2005) conclude that accruals quality (AQ) is a priced risk factor. We explain that FLOS' regressions examining a contemporaneous relation between excess returns and factor returns do not test the hypothesis that AQ is a priced risk factor. We conduct appropriate asset-pricing tests for determining whether a potential risk factor explains expected returns, and find no evidence that AQ is a priced risk factor.
Number of Pages in PDF File: 50
Keywords: Asset pricing tests, Accruals quality, Information risk, Portfolio theory and diversification
JEL Classification: D80, G11, G12, M41
Date posted: June 28, 2006 ; Last revised: November 16, 2011
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