Is Accruals Quality a Priced Risk Factor?

Abstract

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.

Keywords: Asset pricing tests, Accruals quality, Information risk, Portfolio theory and diversification

JEL Classification: D80, G11, G12, M41